Lowe’s Makeover Attempts Could Drive Results This Year But Priced In

LOW: Lowe's logo

Eager to expand in Canada, Lowe’s (NYSE:LOW) expressed an interest in acquisitions, which brought its Canadian rival Rona into the spotlight last week as a potential take-over target. With Rona, Lowe’s could better compete with Home Depot (NYSE:HD), which currently has six times the number of stores in Canada than Lowe’s. However, Rona has declined any interest for sale. Lowe’s has underperformed Home Depot in the past three years. However, it’s been working hard with its new branding campaign, focusing on web-sales, in-store technology and efficiency initiatives, and we expect its makeover to start transforming into results this year.

See our complete analysis of Lowe’s here

Lowe’s Eager to Expand in Canada

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Despite the huge opportunity for big box home improvement retailers in attractive international markets, Lowe’s lags well behind its larger peer Home Depot in terms of presence outside the U.S. Lowe’s currently has only 30 stores in Canada compared to Home Depot’s 180. Lowe’s itself sees an opportunity for at least 100 stores across Canada, which makes the country’s largest home improvement retailer Rona, with its 58 big box stores, an interesting acquisition target for Lowe’s. Rona’s shares jumped 12% with the news but retreated as it declined any interest.

Lowe’s Self Improvement to Capture Higher Market Share

Lowe’s has underperformed Home Depot in the past three years, but recently turned proactive with organizational restructuring, cost-cutting and efficiency initiatives from in-store technology to online sales and closing down 20 under-performing stores. It launched a new branding campaign last October to re-position itself with the tagline “Never Stop Improving” from earlier “Let’s Build Something Together.” Its recent initiatives also include a shift away from promotions to everyday low prices in an attempt to capture market share.

It launched an online tool “MyLowes” in October with features to lure and engage new and existing customers and boost web sales. It also acquired an online home improvement and lifestyle products retailer, ATG Stores, to expand its presence in the online retailing platform. ATG carries 3.5 million products, and will double the products on MyLowes.com this year. Lowe’s expects its online sales to generate 5-10% of its sales over the next five years, from the present 1%.

With improvements in housing sentiment and proactive restructuring and efficiency initiatives, Lowe’s stock has gained over 50% over the past six months. With no drastic improvements expected on housing or employment this year, it has been trying to diversify revenue streams through online sales and strengthening seasonal and maintenance and repair segments. We believe that Lowe’s will improve its market share and operating margins over the next few quarters, and we think the market has priced in the upside in Lowe’s stock.

We have a $31 Trefis price estimate for Lowe’s stock, almost in line with the current market price.

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