Lowe’s Earnings Review: Upbeat U.S. Economy Drives Sales

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America’s second largest home improvement retailer, Lowe’s (NYSE:LOW) reported strong Q4 and fiscal 2014 results on February 25, backed by an improving U.S. economy and upbeat housing market. The retailer delivered a 7.6% sales increase in the quarter to $12.5 billion, with comp sales growing 7.3% on a year-on-year basis. EPS in the quarter gained almost 57%, to reach $0.46, beating Thomson Reuters consensus estimates of $0.44. [1] The stellar performance in the quarter was predominantly guided by a 4.9% increase in average ticket sizes, as the retailer’s pro services continued to strengthen. In the full year, sales grew 5.3% to reach $56.2 billion, with comp sales increasing 4.3% over the same period. Going forward, strong macroeconomic fundamentals seem to be working in Lowe’s favor to ensure positive performance.

See our complete analysis of Lowe’s here Home Depot’s results

We have a $55 Trefis price estimate for Lowe’s stock, which is currently below market price. We will be updating our model in light of the recent earnings release.

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What Drove Sales For Lowe’s This Quarter?

There is no doubt that the home improvement names have been among the biggest gainers as the U.S. economy continued to grow over the quarter, with unemployment levels reaching six-year lows. The advantages of an upbeat job market, coupled with falling gasoline prices, left Americans with higher disposable incomes to spend on home renovations. The quarter also witnessed higher activity in the housing market, with existing home sales reaching a seasonally adjusted annual rate (SAAR) of 5.25 million in October, the highest sales figure in over twelve months. New home sales also increased to a SAAR of 481,000 in December, the highest recorded in over a year. [2] These developments worked favorably for Lowe’s and could continue to benefit them, even in this year.

Apart from leveraging the supportive external environment, Lowe’s continued to drive revenues by initiating campaigns to take advantage of various customer occasions. Through their Celebrate the Season winter campaign, Lowe’s drove sales by targeting four important occasions : “interior refresh, holiday decor, gifting, and getting organized.” [3]

The pro category continued to be a focus area in the quarter, which was targeted through various initiatives such as the “project specialist program.”  As per the program, Lowe’s aimed at providing a coordinated approach to style selection by providing design expertise from specialists. According to the earnings transcript, the interior project specialist program, constituting an average ticket size of over $10,000, yielded customer satisfaction 15 points higher than industry standards. With expansion to 450 stores in the coming year, we expect this strategy to work well in driving sales in the category. Apart from the project specialist program, Lowe’s also relied on its “canopy program” to further reach out to pro customers. The canopy program aims at improving efficiency in the lumber and building category by displaying select products just outside the pro entrance. Furthermore, LowesForPros, a dedicated online platform for professional customers introduced  last year, was also well received by pilot customers. These efforts and more, resulted in above average comp sales in categories such as flooring, kitchen, appliances, lumber, building materials, millwork, and out-door power equipment.

What Lies Ahead?

We expect the home improvement industry to continue reaping the fruits of a growing U.S. economy continuing in 2015. According to the IMF, the U.S. economy is expected to grow at 3.1% in 2015 guided by higher demand, better consumer confidence, and a reduction in fiscal deficits. [4] Furthermore, unemployment rates are expected to trend downward to remain below 6% during this year. Based on these factors, the National Association of Realtors project existing house sales, to grow at 7.7%. ((In Need of Housing Improvement))

According to a survey conducted by Lowe’s, around 50% of homeowners believe that the value of their homes is increasing, which could motivate home improvement spending in the future. Leveraging this, Lowe’s expects to deliver total sales increases of approximately 4.5-5% this year, with comps increasing 4-4.5%. The management has also indicated the opening of 15-20 stores over the year, which comprises of six orchards and two city centers that are also expected to bring in revenues. The retailer expects EBIT to increase 80 to 100 basis points, with some seasonality persisting from quarter to quarter.

We expect Lowe’s to deliver on these numbers guided by growing pro sales against the backdrop of an improving U.S economy. For fourteen consecutive quarters, sales in the pro category has outdone the overall business for Lowe’s, with the segment growing almost 24% in the last quarter. Lowe’s has made a number of additions in categories that have high pro-penetration, which can be expected to push sales going forward. For example, they have leveraged their relationships with the likes of Hitachi and Kistler to strengthen their presence in pneumatic tools and decorative lighting categories. Also, further consolidation of LowesForPros, which allows pro customers to keep track of purchase histories and also customize products, could also bring in higher customer traffic.

In a duopolistic home improvement market, with Home Depot being the other dominant player, Lowe’s could stand on better ground in the future. This is mainly because Home Depot’s phenomenal performance continues to be threatened by a massive data breach, costs related to which, might drastically impact prospects for the retailer. In this situation, Lowe’s might continue to gain customer traffic going forward to put them in better stead. For now, Lowe’s shares gained 8.6% this year and 1.3% on the earnings news, to reach a record high at $74.69.

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Notes:
  1. How do Lowe’s Earnings Compare to Home Depot? []
  2. “New and existing home sales, U.S.”, National Association of Home Builders []
  3. Lowe’s Companies (LOW) Earnings Report: Q4 2014 Conference Call Transcript []
  4. World Economic Outlook []