Lowe’s Q3 2015 Earnings Review: Results Exceed Expectations With Housing Market Recovery

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Lowe’s (NYSE:LOW) reported fiscal third quarter earnings on November 18. The home improvement giant posted solid results, with comparable sales growing 4.6% on a year-on-year basis, with sales increases across almost all product categories. This was aided by upbeat housing markets, which led to an increase in home improvement spending in the quarter. Here are the key takeaways from the company’s third quarter earnings report, along with what could be in store for the company going into Q4.

Economy and Housing Markets 

Developments in the U.S. economy and housing markets are important determinants of home improvement spending. The recovery in the housing markets was instrumental in both, Lowe’s and Home Depot delivering better-than-expected results this quarter. Let’s look at how key metrics performed in the quarter, along with what could be in store going into Q4.

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Real GDP growth: The U.S. economy clocked in a growth of about 1.5% in Q3. This growth rate was below expectations and slower than previous  quarters. This was because businesses continued to focus on clearing inventory rather than restocking. Most economists expect this to be a temporary phenomenon, with GDP projected to grow at 2% in Q4.

Unemployment Rates: Unemployment rates in the U.S. were recorded at a historic low of 5.2%. This is expected to continue going into Q4, with rates being projected to reach 5.1%. Now, as unemployment rates continue to trends downwards, a higher sense of job security could continue to motivate spending. Furthermore, demand in the U.S. has been responding to oil savings, in which case the home improvement industry could have much to gain even going forward.

Existing and new home sales: Existing home sales and new home sales in the quarter clocked in growth rates of 8.3% and 13.9%, respectively. Although slower, even Q4 is expected to see growth at 5.9% and 8.1% across the two metrics. Considering home improvement spending has a lagged effect, the phenomenal growth seen in the housing markets so far could in itself guarantee higher sales in Q4.

Mortgage rates: The 30-Year fixed rate in Q3 was recorded at 3.9%. However, the U.S. Federal Reserve has been preparing to increase short-term interest rates after almost seven years of near-zero rates. Most economists believe that the first round of rate hikes could come in December this year. If this is true, mortgage rates could also increase going forward. According to forecasts, the 30-Year fixed rate is expected to increase from 3.9% presently to about 4.9% by Q4 2016. In this case, demand for housing could undergo an increase in the short-term to avoid having to pay a higher interest rate in the future.

Clearly, the aforementioned points indicate that the macroeconomic backdrop has been instrumental in driving the stellar performance this quarter, and could continue to drive sales in the next quarter.

Why Lowe’s In Particular?

While the broader trends in the economy and housing markets are favorable for the home improvement industry at large, a number of factors exclusive to Lowe’s could also give it an edge over its competitors. Lowe’s top competitor is industry leader, Home Depot. However, there are other wholesalers, retailers, and e-commerce players that also offer home improvement in addition to Lowe’s.

— Lowe’s has been focusing on enhancing their product portfolio and services to target Pro customers, who have been instrumental in driving big ticket purchases. In that, Lowe’s has been trying to leverage their multichannel capabilities to serve Pro customers better. In this, the retailer introduced project specialist programs, where specialists help customers select products. In Q3, this program was extended to another 475 stores. This initiative, which could bring in more organization in the selection process, could direct Pro traffic towards Lowe’s.

— Lowe’s over the last two quarters has worked on strengthening their brand portfolio, through new launches across product categories. This includes innovations by leading brands such as  Stanley Black & Decker, Hitachi, Bosch, DEWALT, Lenox, and Irwin in relevant categories. Apart from this, the recent launch of HGTV HOME by Sherwin-Williams in paints also drove sales in the quarter. Lowe’s has effectively used strategies to drive sales of existing and new brands. This includes the use of targeted marketing, allowing customers to visualize their purchase in their space, and enhanced customer service to see a purchase is completed to the customer’s satisfaction.

— Last, but not least, Lowe’s has also made improvements to its online platform, lowes.com, in terms of enhancing search capabilities, adding videos to give a better feel of the product, and upgrading the 360 degree view. This could help Lowe’s target the budding online domain going forward. Apart from this, Lowe’s recently also re-launched the Lowe’s for Pros platform, which could make it easier for Pros to coordinate orders and delivery online. This platform could help further increase Pro traffic at Lowe’s.

In conclusion, Lowe’s has posted strong results this quarter, and both, macroeconomic and business-related factors are indicative of yet another strong quarter going into Q4. Furthermore, the surge in spending in light of the holiday season could be an added bonus to an already promising quarter going forward.

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. We will be updating our model based on the recent earnings release.

Key Metrics – Q2 2015

  • Net Sales at $14.4 billion, up 5%
  • Ticket prices at $67.34, down 2.1%
  • Number of customer transactions – up 2.8%
  • U.S. comparable store sales – up 4.6%
  • EPS at $0.80, up 35.6%

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:

  1. Lowe’s Companies’ (LOW) CEO Robert Niblock on Q2 2015 Results – Earnings Call Transcript
  2. Lowe’s Reports Second Quarter Sales And Earnings Results
  3. U.S. Economic Outlook, November 2015
  4. Lowe’s Companies’ (LOW) CEO Robert Niblock on Q3 2015 Results – Earnings Call Transcript
  5. Lowe’s Reports Third-Quarter Sales and Earnings Results

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