Lowe’s Earnings Preview: Q1 May Not Meet Expectations As U.S. Economy Slackens

-20.41%
Downside
255
Market
203
Trefis
LOW: Lowe's logo
LOW
Lowe's

Lowe’s (NYSE:LOW), America’s second largest home improvement retailer after Home Depot (NYSE:HD), is scheduled to announce its fiscal first quarter financial results on May 20. In the past year, the stock price climbed over 60% to register a 52-week high of $75.61 in March. In 2014, net sales grew 5.3% year-on-year to reach $56.2 billion, driven by strong macroeconomic fundamentals and positive performance in the ProServices business. According to the recent earnings transcript, Lowe’s is looking at a 4.5-5% increase in total sales, driven by comp sales growth of 4-5% and the addition of another 15-20 stores in the full year. [1] Furthermore, the retailer expects to report its highest comp in the first quarter. While the full year projections for the U.S. economy and housing markets seem upbeat, the first quarter failed to stand up to expectations. In this situation, while we expect Lowe’s to be able to meet its full year targets, Q1 may not have been as lucrative as anticipated.

U.S. Economy and Housing Markets Did Not Meet Expectations

Developments in the U.S. economy and housing market is important for Lowe’s, since 97% of the retailer’s stores are located across the country. For 2015, the U.S. economy is expected to grow at a rate of 3%, with unemployment projected to reach 5.5%. [2] Furthermore, key determinants of home improvement spending, such as existing home sales and new home sales, are also expected to witness notable gains in the year, which bodes well for Lowe’s. However, the first quarter estimates failed to stand up to the predicted levels, with the U.S. economy growing just 0.2% as opposed to the forecasted 2.3%, against trade disruptions on the West coast, a stronger dollar choking off exports, and a weaker global economy. Furthermore, a harsh winter led Americans to save in the quarter, with consumer spending increasing just 0.1% in February, after declining for two consecutive months for the first time since 2012. Spending failed to pick up even as oil prices continued to drop, leaving Americans with higher disposable incomes. [3] The slow down in the U.S. economy at large, also exerted an impact on the housing markets in the earlier part of the quarter. The sale of existing houses, among the most important drivers for the home improvement industry, fell 4.9% in January to a seasonally adjusted average rate (SAAR) of 4.82 million, the lowest recorded since May 2014. [4] Against these circumstances, home improvement spending may have suffered to an extent in the quarter.

Relevant Articles
  1. Up 17% Since 2023, What’s Next For Lowe’s Stock Post Q4 Results?
  2. How Will Lowe’s Stock Trend After Increasing Only 3% This Year?
  3. Will Lowe’s Stock Trade Lower Post Q2?
  4. Lowe’s Q1 Earnings: What Are We Watching?
  5. Lowe’s Q3 Earnings: What Are We Watching?
  6. Down 28% This Year, Is Home Depot Stock A Buy?

Focus On Pros and Budding Online Business Could Drive Revenues

In spite of weaker economic conditions, a number of factors could offset some of the expected fall in revenues. For one, Lowe’s has taken a number of steps to better cater to Pro customers, who bring in close to 30% of new revenues. For instance, Lowe’s introduced a Project Specialist program, which allows customers to use expert help in “refreshing the interior and exterior of their homes.” [1] The program aims at combining style selection, design expertise, and contractor choice, to get the complete job done. According to Lowe’s, the interior Project Specialist program brings in an average ticket size of over $10,000. With the initiation of the roll-out of this program across 470 stores over the year, Lowe’s can expect to see increasing prominence among Pro customers. ((Lowe’s Companies’ (LOW) CEO Robert Niblock on Q4 2015 Results – Earnings Call Transcript))

Last year, Lowe’s also relaunched LowesForPros, a dedicated online platform for purchase by professional customers. The site is well integrated with the retailer’s purchasing system, which could hone ease of use for Pros by allowing them to streamline their purchases and also customize their product catalogs. With extension to all Pros this year, positive results can be expected even on this front. Additionally, Lowe’s has dedicated continued focus on product categories such as lumber and building material, mill work, rough plumbing and electrical, and tools and hardware, which constitute the highest “Pro penetration.” [5] In this respect, the retailer has added a number of brands to its portfolio that could further push Pro Sales. This includes the addition of Hitachi’s pneumatic tools, in tools and hardware, and Kichler in decorative lighting, all of which are market leaders in their respective categories. Last year, the pro business witnessed 16% growth, with close to 24% growth in the fourth quarter. Given that the average pro customer spends close to $2,000 annually, consolidation in this category could drive revenues for Lowe’s in the quarter and the full year by pushing up average ticket sizes. ((Lowe’s Companies’ (LOW) CEO Robert Niblock on Q4 2015 Results – Earnings Call Transcript))

Yet another promising sphere has been the online business. Last quarter sales at lowes.com grew almost 25%. Acknowledging the fact that of all online purchases, 60% are picked up in-store, 10% delivered from the store, and 30% parcel shipped, Lowe’s has done a great deal to integrate its various channels to drive ease in transaction and to improve speed and efficacy for customers. In this respect, Lowe’s has worked to improve it’s delivery schedule, expanded it’s online offerings, and improved content for its “17,000 highly visible items.” [1] The online sphere is relatively small now but is both fast-growing and promising. Hence, we expect revenue increases on this front as well.  However, Lowe’s may have to face great competition to leave their mark here especially as their arch-rival Home Depot inaugurates its third fulfillment center in the latter half of the year, which will allow delivery of close to 90% of all orders in less than two days time.

Optimism Can Be Expected Even In the Economy

Although the U.S. economy has underperformed in the quarter, this may just be a temporary phenomenon for a number of reasons. For one, the economy experienced this slowdown even in 2014 when GDP contracted 2.1%, but soon recovered to post growth at 4.6%, 5%, and 2.6% the following quarters. ((U.S. Economic Outlook: April 2015)) Hence, even this year, the slowdown in the first quarter may be offset by better performance in the other quarters, to set the U.S. economy growing at its forecasted rate of 3%. However, continued strengthening of the greenback and weakness in the global economy could loom over these prospects. Second, although the housing markets showed slowdown in the beginning of the quarter, it picked up, with existing home sales surging 6.1% to reach a SAAR of 5.19 million in March, the highest in 18 months. [6] The National Association of Realtors (NAR) projects existing home sales and new home sales to grow at 6.4% and 33% in 2015 against low interest rates, stability in the job market, and improving consumer confidence. ((U.S. Economic Outlook: April 2015)) In spite of this, existing home sales in absolute numbers have not yet reached their pre-recession levels, which is indicative of potential in the years going forward, which bodes well for the home improvement industry. Against these factors, Lowe’s could, in fact, achieve it’s full-year targets in spite of a slower than expected start to the year.

See our complete analysis of Lowe’s here

We have a $78 Trefis price estimate for Lowe’s stock, which is above the current market price.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap U.S. Mid & Small Cap European Large & Mid Cap
More Trefis Research

Notes:
  1. Lowe’s Companies’ (LOW) CEO Robert Niblock on Q4 2015 Results – Earnings Call Transcript [] [] []
  2. U.S. Economic Outlook: March 2015 []
  3. Economic Growth Slows Sharply In Q1 2015: 5 Factors Slowing US GDP []
  4. January 2015 Existing-Home Sales []
  5. Q3 2014 Earnings Call Slides []
  6. Existing-Home Sales Spike In March []