Lowe’s Delivers Strong Results But Best May Be Yet To Come

by Trefis Team
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In our previous article discussing Lowe’s (NYSE:LOW) we talked about the company’s new strategy focused around controlling costs through lower capital expenditure and improving customer satisfaction through an increased focus on online channels. We also talked about how an improving housing market and Hurricane Sandy could be expected to play a greater role in putting wind in the sails of the home improvement retailer.

See our complete analysis of Lowe’s here

Our optimism regarding the company’s future, despite negative performances in the past, now looks even more justified with Lowe’s declaring a vastly improved third quarter performance. The company posted net earnings of USD 396 million, an increase of 76% over the previous year, when the corresponding figure stood at USD 225 million. Pre-tax earnings, meanwhile, stood at USD 635 million, up 80% from last year.

Lowe’s improved performance, following a slump in sales in the second quarter, was reflected across the company’s portfolio of home improvement products. Of its basic products segments, 12 out of 14 saw a positive change in same-store sales. Some of the credit could be given to higher sales of household repair items and power tools as customers geared customers geared up for Sandy. The company downplayed the overall effect of the storm, however, as a slump in business during the storm more than offset the pre-storm sales boost.

Instead, Lowe’s credited the improved performance on more internal factors. A renewed focus on promotions, innovation in in-store displays,  improved customer focus in-store and online, and competitive pricing were some of the key factors credited with top line growth. Bottom line improvements were primarily achieved through design innovations to reduce input costs and by focusing on an online store model to reduce expenditure associated with new stores. The company also eliminated a chunk of its workforce earlier in the year. As a result of these initiatives, net sales for the quarter grew by 2%, touching the USD 12 billion mark while SG&A expenses declined from USD 3.2 billion to around USD 3 billion – a decline of 6.5%.

The recovery of the US housing market has also clearly played a large role in the revival of the company’s fortunes, leading consumers to invest more in in expensive home improvement solutions. Big-ticket items (items costing more than 500$) saw the highest traction during the quarter, with sales up by 2.5%.  Items between 50 to 500$ saw sales rise by 1.6%, while under-50$ items rose by a 1.3%.

Lowe’s positive results was predictably met with cheer on the NYSE. The stock rose by $1.98 within the trading day to close at $33.96, an increase of more than 6%. EPS for this three month period equaled 35 cents per share, compared to 18 cents a year ago.

Of course, one needs to keep in mind that Q3 2011, the company’s profits were weighed down by one-time charges of USD 368 million due to structural changes that occurred as the company realigned its strategy. These included closing down unprofitable stores and discontinuation of various projects. In Q3 2012, such one-time charges stood at around USD 85 million.

The company’s future prospects remain positive as we had discussed in our past article, with the full benefits of Lowe’s renewed strategy yet to make itself felt in its full capacity. On the macroeconomic front, the outlook looks cautiously positive, although a lot will depend on the fiscal cliff, and how such macroeconomic factors have an effect on the housing market. Moreover, as recovery from Hurricane Sandy picks up, there is expected to be a surge in demand for various house repairing materials, appliances etc in the near future. Overall, our outlook on the company remains optimistic.

We will shortly revise our $33 Trefis price estimate for Lowe’s stock based on results from the latest quarter.

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