Uptick In Consumer Spending Could Boost Sales For Lowe’s In Q2

American home improvement retailer Lowe’s (NYSE:LOW) is scheduled to announce Q2 results on August 20. Improvement in consumer spending and the overall business environment in the U.S. in the second quarter ended July, are expected to boost sales for the company. As the domestic housing industry regains momentum, after a slight slump in the early part of the year, sales to professional (pro) customers should improve for Lowe’s this quarter. Comparable sales growth for the pros business, which forms around 30% of the net revenues for Lowe’s, was three times the company average in the first quarter. In addition to higher anticipated pro customer sales, sales to do-it-yourself consumers is also expected to grow due to higher consumer spending this quarter, especially on durable goods. Sales for the retailer in Q1 missed consensus estimates as bad weather conditions kept consumers from spending on home improvement, primarily on outdoor projects. However, sales in the home improvement market are expected to improve this quarter due to pent-up demand, as consumers engage in repair and retrofitting activities. Although Lowe’s reported only a 0.9% comparable sales growth in Q1, strong early sales in May and the estimated increase in home improvement sales in Q2 could help the company reach its 2014 target of 4% comparable sales growth.

We have a $49.58 Trefis price estimate for Lowe’s stock, which is roughly in line with the current market price.

See our complete analysis of Lowe’s here

Lowe’s Sales Could Rise As The Housing Market Regains Momentum

Lowe’s’ business is impacted by the number of house sales, as new occupants spend on home improvement supplies and construction products and services. Macroeconomic factors are starting to favor growth in this market, as seen by the increases in home sales in the second quarter. Hurt by the overall slowdown in economic activity, along with high lending rates, sales of existing homes declined from a seasonally adjusted annual rate (SAAR) of 4.87 million in December to 4.62 million in January, 4.6 million in February and 4.59 million in March. ^[1] In fact, sales in March represented a year-over-year decline of 7.5%. New home sales also remained low, and fell to a SAAR of 384,000 in March from 449,000 in February. However, following the first quarter, house sales have picked up in the U.S. Existing homes sales improved in April, May and June to reach a SAAR of 5.04 million, which is the highest sales figure since seen in October last year, although 2% lower than June 2013 levels.

Following tepid growth in the first quarter of the year, the domestic housing market seems to be regaining momentum, supported by declining lending rates and unemployment rate, and improving consumer affordability.

• Following a negative 2.1% contraction in the U.S. GDP in Q1, the country’s GDP returned to positive growth in the second quarter, increasing by 4%. ^[2] In particular, personal consumption expenses rose 2.5%, with spending on durable goods increasing 14% percent, compared with only a 3.2% growth in Q1. This growth can act as a reference, reflecting how sales for Lowe’s might also have grown in line with the increase in consumer spending.

• According to Freddie Mac, the average rate for a 30-year fixed-rate mortgage declined to 4.13% in July from 4.43% in January and 4.37% in July last year. ^[3] Potential home buyers have looked to take advantage of the lowered borrowing costs, boosting home sales. Lending rates had previously been on a rise since the first half of last year, fueled by the Federal Reserve’s announcement of reduction in bond purchases, which had kept the long-term interest rates low. ^[4]

• Home sales are also impacted by the general business environment that affects job creation and incomes. The U.S. unemployment rate fell to 6.1% in June, the lowest rate since recession started in September 2008. ^[5] Although the unemployment rate rose slightly to 6.2% in July, the figure is still much lower than the 7.6% rate in July last year. This bodes well for the housing industry as job creation would facilitate income growth and consequently also support home sales. In addition, with job stability, consumers might also look to increase spending on home improvement products.

• Rising house prices are closely associated with consumer affordability. After decreasing by more than 30% during the recession, home prices picked up momentum in 2012-2013, rising to within 20% of the peak 2006 levels. ^[6] Home Depot, the main competitor for Lowe’s, expects home prices to grow by 6% in 2014, which although lower than the rise in 2013, reflects steadily growing incomes, affordability and consumer demand. While during their peak in 2006, home prices were almost 40% overvalued, as compared to metrics such as cost-to-rent and incomes, the domestic housing industry remained 4% undervalued based on the same fundamentals at the end of last year.

According to the Home Improvement Research Institute, home improvement product sales in the U.S. are expected to rise to $309 billion this year, up 6.5% year-over-year, after rising 4.2% in 2013. ^[7] Although Home Depot leads the domestic home improvement market with around 27.2% market share, Lowe’s is also well positioned in this market with a 18.4% value share. With economic activity and consumer spending picking up, home improvement sales and consequently Lowe’s’ sales are also expected to grow this quarter.

Acquisition Of Orchard Stores To Boost California Sales This Quarter

Lowe’s acquired Orchard Supply Hardware, a neighborhood hardware and backyard store focused on paint, repair and the backyard, in August 2013. As a result, Lowe’s’ store count increased by 72 new units, and Orchard stores represented 2% of the net sales in 2013. With the inclusion of new business, Lowe’s sales should improve this quarter on a year-over-year basis. In addition, the acquisition of Orchard stores is expected to strengthen Lowe’s’ presence in the Western state of California, where both Home Depot and Sears have a significant presence. Home Depot had a massive 232 stores in the densely populated California state at the end of 2013, more than double the store-count for Lowe’s in the state.

As Orchard stores are primarily located in California, Lowe’s could boost its sales in the Western part of the country, given the improved economic conditions and higher pro sales expected due to housing recovery. Lowe’s could also grab additional market share in the region, especially from Home Depot. California is the largest sales market for Home Depot, and with comparable sales in the region growing almost twice the U.S. average, the company’s overall U.S. comparable sales rose by 3.3% year-over-year in Q1 2014, despite the unusually cold weather in the quarter that kept comps from other regions flat to negative. Before the Orchard acquisition, around 6% of Lowe’s revenues came from California, compared to over 10% for Home Depot. ^[8] We expect Orchard stores to contribute additional sales to Lowe’s top line this quarter, strengthening the company’s aim of 5% sales growth this year.

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1. “New and existing home sales, U.S.“, National Association of Home Builders [↩]
2. U.S. GDP growth rate [↩]
3. 30-year fixed-rate mortgages since 1971 [↩]
4. historical 30-year fixed-rate [↩]
5. U.S. unemployment data [↩]
6. What’s ahead for 2014 housing market [↩]
7. Home improvement research institute forecasts [↩]
8. Why Lowe’s is losing the housing recovery to Home Depot, businessweek.com [↩]