Lowe’s (NYSE: LOW), which competes primarily with Home Depot (NYSE:HD) in the home improvement market, recently reported first quarter 2011 earnings. Net sales for the quarter decreased 1.6% and comparable sales decreased 3.3%. In the second quarter, however, the company believes that it can gain momentum. It forecasts second quarter sales to increase 4% and comparable store sales to increase 2%. [1].
Weak Demand and Unfavorable Weather Impact Sales
The company attributes its lower than expected sales results in the first quarter in part to increasing gasoline prices, as a result of which customers made fewer trips to its stores. [2]. In addition to this, a colder than expected spring season also impacted sales as many customers held off on seasonal purchases for painting and other outdoor activities. However, the largest concern remains the health of the housing market. Many homeowners continue to hold off on expensive repair and renovation work, as they remain cautious on their home improvement spend due to fears of a double dip in the housing market. [3]
However, Lowe’s is introducing new plans to boost sales going forward. It has entered into an agreement with Sungevity, a leading player in the residential solar market. According to the agreement, Sungevity will offer its solar solutions to Lowe’s customers through an interactive, in-store experience in exchange for Lowe’s taking an equity position in Sungevity. Following the initial roll-out in select stores, the program could ultimately extend to all of Lowe’s stores, which service around 15 million customers per week. Lowe’s is counting on leveraging this partnership to meet the growing demand for solar solutions. [4]
Plumbing, Electrical & Kitchen Market Share Can Improve
Lowe’s plumbing, electrical & kitchen division, which includes the solar appliances sold by the company, is the largest value driver for Lowe’s by our estimates. This segment contributes around 33% of our $24.50 stock price estimate for Lowe’s. Our price estimate stands roughly in line with the current market price.
The growth in Lowe’s plumbing, electrical & kitchen market share has slowed down in the last few years with Home Depot undertaking several initiatives to consolidate its position. Going forward, we expect the market share for Lowe’s to increase from 17.4% in 2010 to 18.5% by the end of our forecast period. Among other things, Lowe’s new initiatives in the solar market could present upside to our base case market share projections.
See our complete analysis for Lowe’s stock here
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