Lowe’s Gains on Sales in Appliances and by Focusing on Profit Margins

by Trefis Team
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Lowe’s (NYSE: LOW) is the world’s second largest retailer of home improvement products after Home Depot (NYSE:HD). Through its more than 1,700 stores spread across the US, Canada and Mexico, Lowe’s offers a wide range of home improvement products and installation services to individual home owners as well as professional builders.

We estimate that Lowe’s Plumbing, Electrical, & Kitchen segment is the single largest value driver of the company’s operations, generating close to 33% of our estimated $25.87 stock value for Lowe’s, which is in line with the current market price.

Appliances Picking Up…

Lowe’s reported its 3Q FY10 results showed positive results with YOY sales for the quarter increasing by nearly 2%. For the first nine months of fiscal 2010, Lowe’s reported sales increase of 3.5%.

In addition to an increasing trend of do-it-yourself (DIY) for tackling home improvements rather than hiring someone, an increase in market share in appliances, has helped to boost Lowe’s sales this year. The appliances segment is a part of our Plumbing, Electrical, & Kitchen division for Lowe’s.

Sears (NASDAQ:SHLD) has been losing market share to rivals Lowe’s and Home Depot in the appliance segment which includes items such as refrigerators, washer-dryers, gas ranges and ovens. In addition to increasing its product range and opening more stores,  Lowe’s  gains leverage in attracting shoppers, especially female customers, as its stores are brighter, cleaner and better maintained.

Last year, Lowe’s share of the US appliance market rose nearly 4 percent to $4.54 billion, or about a fifth of the total, according to This Week in Consumer Electronics.

Currently, we estimate Lowe’s North America Plumbing, Electrical, & Kitchen Market Share to increase from 17% in 2009 to almost 19% in 2017.

…Focusing on Margins

With consumer spending and the housing market being slow to pick up, another initiative taken by Lowe’s is to improve margins. Lowe’s executives said they will focus on margin growth initiatives like offering more private label goods and making structural changes to become more competitive on prices on a local level. The company also has installed a new inventory management software to help individual stores keep better track of prices.

Plumbing, Electrical & Kitchen profit margins (EBITDA margin) declined from below 14% in 2006 to around 10% in 2009 due to increasing expenses and pricing pressure to maintain market share during the economic slowdown. We believe that as Lowe’s enters 2011 with consumers spending cautiously, the pricing war among home improvement retailers could put downward pressure on its margins. We forecast the decline in Lowe’s EBITDA margin to continue, with the Plumbing, Electrical & Kitchen EBITDA falling to about 9% by 2017.

However, the above short term trends (Lowe’s gaining market share in the appliance segment and its margin growth initiative) have the potential to help Lowe’s gain more market share as well as sustain margins for its Plumbing, Electrical, & Kitchen division in the long run.

If the  Lowe’s North America Plumbing, Electrical, & Kitchen Market Share increases to around 20% by 2017, and the Plumbing, Electrical & Kitchen EBITDA Profit Margin stays at around 10% by 2017, there can be a 7-8% upside to our estimate for its stock price.

See our full analysis for Lowe’s here.

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