Lowe’s Q2 Earnings Review: Pros and Dotcom Sales Could Support Further Growth

August 20th, 2015 by Trefis Team

+5.22%

Upside

228

Market

240

Trefis

LOW

Lowe's

America’s second largest home improvement conglomerate, Lowe’s (NYSE:LOW), reported fiscal second quarter earnings on August 19. While the company missed on EPS numbers by $0.04, it beat analyst estimates in revenues, which grew 4.2% year-on-year. Lowe’s, along with Home Depot has been a major beneficiary of the U.S. economic recovery, with the stock growing by over 200% over the past 5 years. In spite of a slower start to the year against weaker macroeconomic fundamentals, Lowe’s has seen a rebound in Q2. Here is an overview of the key take aways from the company’s Q2 earnings report and an analysis of what could ensure further growth for the company going forward.

Economic and Housing Stats Could Support Home Improvement Spending

The performance of retail giants such as Home Depot and Lowe’s is highly contingent on the performance of the U.S. economy and housing markets since a large majority of stores for both retailers are located across the U.S. While the U.S. economy posted a sluggish start in Q1, it rebounded to post growth rates of about 2.3% in Q2. Although economists worry that this growth in the economy is slower than the anticipated growth and lower than the pace of the overall economy’s growth, it has definitely had a positive impact on consumer spending in the U.S, which increased by 2.9% in the quarter. Furthermore, spending on housing furnishing and equipment was among the biggest beneficiaries, posting a 6% increase in the quarter.

Relevant Articles

A big reason for this increase in expenditure on housing equipment has been a result of higher activity in the housing markets. In Q2, existing and new home sales hit record highs, backed by lower fees on FHA mortgages and tax credits. Even going forward, upbeat projections for the U.S. housing market could ensure further sales growth for home improvement names. The National Association of Realtors (NAR) anticipates a 7% increase in existing and new home sales, with an estimated total of 5.8 million home sales in 2015. Furthermore, this figure is approximately 25% less than the total observed pre-recession, indicating that there is immense potential in the U.S. housing markets that could be uncovered.

Company Strategies That Worked In Q2 And Future Prospects

The biggest driver for Lowe’s in Q2 was a 3.3% gain in average ticket prices. The company recorded its “strongest performance in big ticket” in the quarter, particularly in categories such as appliances, kitchen, outdoor power equipment, and seasonal living. Here are the top factors that could guarantee further growth for Lowe’s going into Q3.

— Strong Product Portfolio: Lowe’s could have much to gain going forward predominantly based on their strong product portfolio. For instance, in their appliance division, Lowe’s is home to a number of top brands such as Whirlpool, LG, Electrolux, and Samsung. Furthermore, the company has consistently worked to innovate, to better its product portfolio. This includes brands such as Kobalt 80 Volt Handheld Outdoor Power Tools and the Hustler Raptor 60 inch zero-turn mowers, which are new and exclusive products in the mower category. Even in the paint category, Lowe’s benefited in the quarter from the recent launch of HGTV HOME by Sherwin-Williams, a leading brand in the category. These strong brands, coupled with Lowe’s expertise with driving these brands among customers, could ensure further sales going forward.

— Focus on Pro Customers: On the one hand, while Lowe’s boasts of a strong product portfolio, the brand has been working to strengthen those brands that have high pro penetration. This includes brands such as Glodblatt masonry tools, GAF Roffing, and Owens Corning Insulation. Lowe’s has also expanded its line of Hitachi pneumatic nails and fasteners, which offer easier and more powerful tools to save time on the job for Pros. These products could help increase Lowe’s presence among the pros to further drive up ticket sizes.

Apart from strengthening brands that are pro-focused, Lowe’s also relaunched the lowesforpros platform, which has seen increasing traffic. With the stage set to see further promotions for the website, Lowe’s could benefit from further pro traffic going into Q3. The company has also set up an account executive pro services (AEPs), which help streamline orders and product availability for customers across stores. These AEPs have been instrumental in driving pro customers, particularly in the maintenance, repair, and operations (MRO) division. However, Lowe’s could face stiff competition in this segment in light of Home Depot’s recent acquisition of Interline Brands, a leading distributor of maintenance, repair, and operations (MRO).

— Consolidating Online Business: For both, Lowe’s and Home Depot, dotcom sales over past few years have been seeing phenomenal growth and both retailers have directed resources to better leverage the potential here. In Q2, Lowe’s online business grew approximately 20%, which has been guided by improved product search and presentation, innovations across available features, and easy usability. For instance, in Q2, Lowe’s added close to 3,500 new products to the site and increased 360 degree visibility for a number of new products. Furthermore, Lowe’s also added videos and better images for a range of products to help customers better assess them before purchase. Clearly, Lowe’s is trying to increase their site appeal and could further enhance their product portfolio in the dotcom space. These strategies have resulted in phenomenal results, which is evident from a double digit growth in the number of new customers (i.e. those that have not used the site previously) using the platform. The dotcom segment presently accounts for a meager 3% of the company’s business, but shows huge promise, which coupled with further improvements to the site, could garner a larger customer base for Lowe’s going forward.

Home Depot versus Lowe’s

Finally, there is the comparison with Home Depot, America’s largest home improvement retailer. Although Home Depot takes the cake in the U.S. home improvement space, Lowe’s is not too far behind. While both names have a strong product portfolio, Lowe’s could see higher growth against a number of factors. First, Home Depot is still bearing the costs associated with a huge data breach last year, that left customer’s card details compromised. The management indicated that the retailer incurred close to $132 million in breach-related expenses, net of insurance. Lowe’s may be better positioned in this case since costs related to the breach could be a drag on Home Depot’s profits. Second, over the past few years, Lowe’s efforts at extending their geographical footprint has surpassed that at Home Depot, where the focus has been more on driving profits through efficiency. Even in 2015, while Home Depot is targeting 6 new stores in the year, Lowe’s is targeting 15-20 new stores. In this case, Lowe’s could see a higher inflow of new revenues going forward. In conclusion, we believe that Lowe’s could see further growth in the coming year, backed by innovations across its product lines, higher pro and dotcom traffic, and an upbeat U.S. housing market.

See our complete analysis of Lowe’s here

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

Key Metrics – Q2 2015

Net Sales at $17.3 billion, up 4.5%
Ticket prices at $67.83, up 3.3%
No. of customer transactions – up 1.2%
U.S. comparable store sales – up 4.6%
EPS at $1.20, up 15.4%

FY 2015 Guidance

Sales expected to increase 4.5-5%
Comparable sales expected to increase 4.5-5%
Diluted EPS of $3.29 expected

Sources:

View Interactive Institutional Research (Powered by Trefis):

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

Relevant Articles

EXPLORE TREFIS