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The company also said lumber was its strongest category, driven by strong demand from both professionals and do-it-yourself customers.
Lowe's EBITDA Margin: From 2013-2017, Lowe's improved margins from 11.5% to 12.8% by streamlining its operations, supply chain, and cutting down heavily on its SG&A expenses. However, in 2018, the margins slipped to 8.7% as a result of greater SG&A expenses. In 2019, the margins improved to 11.5%. Going forward, we expect the margins to improve further 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 14%. On the other hand, if the housing market and home improvement industry continues to strengthen, and outpace previously forecast growth estimates, and comps improve better than expected, resulting in the margins reaching 16.1%, there could be an over 5% upside to our current price estimate.
Lowe's is the world’s second largest retailer of home improvement products, after Home Depot. Through its ~1977 stores spread across the U.S., and Canada (having recently exited from Mexico), Lowe's offers a wide range of home improvement products and installation services to individual home owners 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 1,977 stores at the end of FY 2019. It is also trying to increase its presence in Canada. Lowe's is keen to venture aggressively into Mexico's home improvement industry where it recently opened two stores. Lowe's main selling point is that it outshines its main competitor Home Depot in terms of in-store shopping experience for the consumers. This has forced Home Depot to upgrade its store environment and provide better customer service.
Lowe's business is vulnerable to the housing market and the recent slowdown has affected its sales to a great extent in the past three years. In the current slow economy, attaining historical high revenue growth rates seems very difficult to replicate 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.
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.
Unemployment was at its lowest since 2000, and wages were improving. (Before the coronavirus outbreak which has halted the world's economies.) Although interest rate hikes make mortgages more expensive, on the whole, it is indicative of a strong economy. These factors signal a solid U.S. economy, and have given rise to supportive housing fundamentals. This bodes well for a company like Lowe's that is heavily reliant on the improvement of the housing industry
The housing market has seen a resurgence of late. While things have not returned to the boom times, the number of new houses built last year was the most since 2007. People who buy new homes spend money on improving their homes, installing appliances, buying furnishings, etc. It is not just the new homes, but remodeling of existing houses is also on an upswing.
The NAHB (National Association of Home Builders) report forecasts remodel spending to increase 4.9 percent above 2017 levels in 2018, with additional growth of 0.6 percent forecast for 2019. First time buyers, who are mostly millennials and baby boomers, are set to drive this growth in the coming years.
Lowe's' share price and performance, in general, has continued to benefit from the phenomenal growth in housing markets in the previous years, and steady growth in recent times.