Acquisitions To Help Boost Lowe’s Revenues In The Second Quarter

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Lowe's

Lowe’s (NYSE:LOW) is slated to report its second quarter earnings on August 23, before the markets open. Impressive growth in the earnings and revenue is expected, driven by the acquisitions of Maintenance Supply Headquarters in June, and Central Wholesalers back in November of 2016. Furthermore, comparable sales growth and the addition of stores should also provide a boost to the earnings. While the gross margins are expected to remain pressured as a result of the RONA acquisition, reduced SG&A expenses, due to lower labor costs, as well as a fall in the interest and tax expense should result in EBITDA and net margin improvement.

Acquisition Of Maintenance Supply Headquarters

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Recently, Lowe’s announced that it had completed the $512 million acquisition of Maintenance Supply Headquarters, which is a leading distributor of maintenance, repair, and operations products, and primarily serves the multi-family housing industry. This acquisition is likely to give Lowe’s a better control over its “Professional Segment” – an area where its competitor Home Depot is currently ahead. Professional customers place larger orders compared to the do-it-yourself segment and serving these customers better can boost revenues for Lowe’s in the long term.

The recovery in the housing segment has benefited players such as Home Depot and Lowe’s. However, Lowe’s growth has not been as stellar as Home Depot’s, primarily due to its focus on the do-it-yourself consumer segment. Home Depot, on the other hand, has remained focused on the big-ticket professional segment which had driven growth for the company.  While the do-it-yourself segment is lucrative and accounts for the bulk of Lowe’s revenues, these customers are small ticket buyers and many are just one time customers. On the other hand, pro-customers account for only 30% of Lowe’s revenues, but they enter into big-ticket transactions and are usually repeat customers. Pro-customers account for nearly 40% of transactions above $500 at Lowe’s, and creating a loyal base of these customers can drive growth for the company in the long term. One of the key ways to grow its pro-customers is to offer a wider range of products to meet their requirements and the acquisition of Maintenance Supply Headquarters can help Lowe’s to increase its offerings significantly. Through this acquisition, Lowe’s is likely to increase its focus on the professional segment. The company expects that after this acquisition its multifamily maintenance, repairs, and operations business will generate more than $400 million in incremental annual sales. We believe this acquisition is a key part of Lowe’s future growth strategy and should drive revenues for the company in the long term.

Integrated Retail Channels

Lowe’s is investing in an omni-channel retail strategy to enhance customer experience. The company is advancing its omni-channel experience to make it easier for customers to engage with its interior and exterior home project specialists. On its website, the company has added online scheduling capabilities which have led to a large number of customers seeking online appointments for these specialists. Lowe’s is also looking to add online tools to its website to improve the customer experience. An integrated retail channel is likely to remain a key growth driver for Lowe’s as customers look for convenience to shop for products and visualization tools to virtually “try” products to understand how they would look in their homes.

International Expansion

Lowe’s acquisition of RONA last year remains a key growth driver in Canada. The company is leveraging RONA’s local expertise along with its own scale to establish itself as a strong player in the region. In the current fiscal year, it will convert six RONA big box stores into Lowe’s branded stores. Cost synergies are likely to unlock the value of this acquisition and will result in improved sales for Lowe’s as the company looks to expand beyond the U.S.

See our complete analysis for Lowe’s.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Lowe’s

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