Housing Recovery Continues To Help Lowe’s Improve Sales

by Trefis Team
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Home improvement retailer Lowe’s (NYSE:LOW) posted its Q4 2012 results, and investors will be pleased with the way things have turned out for the company during the full year. After years of top line stagnation following the housing bust of 2009, Lowe’s has finally marked something of a turnaround in 2012, with steady growth in both net sales and margins. The growth can be attributed to the recovery in the U.S. housing market, which has improved consumer appetite for home improvement products. Fourth quarter sales were also lifted due to repair-related spending, following the damage caused by hurricane Sandy towards the end of 2012. Investors should note that the company’s Q4 2012 was a week shorter than Q4 2011, and this has weighed on comparisons with the Q4 and full year results of 2011.

See our complete analysis of Lowe’s here

Top Line Receives Housing Boost, Sandy Sales Also Pitch In

Lowe’s net sales in Q4 2012 (adjusted for the extra week) were up by around 2.8%, in line with the company’s performance over the first nine months of 2012, when net sales were up by 2.6%. The main sales drivers in the fourth quarter were again macroeconomic in nature – primarily declining unemployment, increasing home occupancy rates, higher rates of home construction and spending as well as new home sales.

The company’s efforts at revamping its in-store display and product arrangement also helped as comparable same-store sales (comps) increased by a healthy 1.9% over the quarter. The company has a ‘Value Improvement’ plan in place designed specifically to help improve factors such as easier purchase for customers through new product labeling, arrangement and general store layouts.

Sales were also given a boost by repair-related purchases following hurricane Sandy – the company estimates the net sales effect to be around 70 basis points. The company believes only a fraction of the total repair work was initiated in Q4 2012, and the sales boost is likely to be felt throughout 2013.

For the full year 2012, sales stood at about $50.5 billion, up by around 2.2% adjusted for the extra week in 2011. Comparable same-store transactions increased by 0.5% while comparable average ticket prices increased by 0.9%.

Moving forward, we expect the recovery of the housing market to continue at a steady pace fueled by declining unemployment, increasing population and low inventory levels. This should equate to continued growth in sales for Lowe’s.

Promotions Hurt Margin Gain

Lowe’s gross margins were up by 5 basis points during the final quarter. The gross margins were boosted by the company’s ‘Value Improvement’ plan, which also works towards making Lowe’s stores more efficient through better inventory management. The plan boosted margins were more than 30 basis points. However, this benefit was almost entirely offset by factors such as the company’s proprietary credit value proposition, which offers customers a choice of 5% off everyday or promotional financing mix. This plan helps Lowe’s comps by attracting more customers, but takes its toll on the cost structure. Going forward, we expect the company to make some slow, but steady gains in margins as the ‘Value Improvement’ plan progresses.

We have a  $36 Trefis price estimate for Lowe’s stock, which we will revise based on the latest results.

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