VALUATION HIGHLIGHTS

1. Lowe's constitute 100% of the Trefis price estimate for Lowe's's stock.

WHAT HAS CHANGED?

1. Lowe's Saw Mixed Q4 Estimates

In a challenging macroeconomic environment, Lowe's posted a 1.5% decline in comparable-store sales or 0.7% in the U.S., and it missed top-line estimates but beat bottom-line estimates in the fourth quarter of 2022. The company's revenue rose 5% year-over-year (y-o-y) to $22.4 billion.

Lowe's completed the sale of its Canadian retail business to Sycamore Partners in Q4 2022. As a result, it is now solely focused on the transformation of its U.S. business.

Note: Lowe's FY'22 ended on February 3, 2023.

2. Full Year 2023 Guidance

For the full year, Lowe's indicated it now expects revenue in the range of $88 to $90 billion. On the bottom line, its EPS is expected to come in the range of $13.60 to $14.00. Also, Comparable sales are expected to be flat to down 2% as compared to the prior year.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Lowe's EBITDA Margin: From 2019-2021, Lowe's improved margins from 11.6% to 15.3% by streamlining its operations, supply chain, and cutting down heavily on its SG&A expenses. However, this value was down to 13.3% in 2022, due to the rampant inflation. Going forward, we expect the margins to improve through our forecast period, aided by same-store growth and with further operating leverage as comps improve. However, if the comps grew slower than expected, it can cause a 10% downside to our current price estimate, with margins reaching just under 17%. On the other hand, if the housing market and home improvement industry continue to strengthen, and outpace previously forecast growth estimates, and comps improve better than expected, resulting in the margins reaching 20.1%, there could be an over 5% upside to our current price estimate.

BUSINESS SUMMARY

Lowe's is the world's second-largest retailer of home improvement products, after Home Depot. Through its 1,738 stores spread across the U.S.(having exited from Mexico and Canada), Lowe's offers a wide range of home improvement products and installation services to individual homeowners as well as professional builders. In addition to the physical stores, consumers can buy these products through the company's dedicated website.

Lowe's has deep penetration levels in the U.S. with a total of 1,738 stores at the end of FY 2022. Lowe's main selling point is that it outshines its main competitor Home Depot in terms of the in-store shopping experience for consumers. This has forced Home Depot to upgrade its store environment and provide better customer service. Also, Lowe's is more focused on the do-it-yourself niches while its main rival performs better with professional contractors.

KEY TRENDS

Pro customer activity will drive home improvement industry growth in the near future

Professional customers place larger orders compared to the do-it-yourself segment, and better serving these customers can boost revenues for Lowe's in the long term. While the recovery in the housing segment has benefited players such as Home Depot and Lowe's, the latter's growth has not been as stellar, primarily due to its focus on the do-it-yourself consumer segment. 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. Keeping this in mind, the company has been focused on these customers by introducing pro-focused brands such as Mapei and Zoeller.

Shift in consumer preferences will impact the traditional range of home improvement products

A survey from NRHA suggests a change in the buying patterns among U.S. home improvement consumers. People are no longer loyal to only products made in the U.S. Consumer demand is driven more by price and quality. Consumers may find foreign products which are better suited to their needs more appealing than products made in the domestic market. Another observable trend is the shift in consumers toward buying green or eco-friendly products such as water-saving flushes and electricity-saving appliances.

Dependent on Macroeconomic Conditions

Lowe's is heavily reliant on the improvement of the housing industry. The housing market has seen a resurgence of late. People who buy new homes spend money on improving their homes, installing appliances, buying furnishings, etc. It is not just the new homes; the remodeling of existing houses is also on the upswing.

Lowe's share price and performance, in general, have continued to benefit from the phenomenal growth in housing markets in the previous years, and steady growth in recent times.