Hurricanes Provide A Lift To Sales For Lowe’s In The Third Quarter

by Trefis Team
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Lowe's
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Lowe’s (NYSE:LOW) delivered a beat on both sales and earnings in its third quarter, helped by a higher demand for emergency supplies and building materials as a result of the hurricanes, as well as lower costs. The comparable sales rose 5.7%, again above expectations of a 4.6% growth. Besides the aforementioned factors, a strong housing market has benefited Lowe’s, with the US home improvement comp coming in at 5.1%. However, despite the impressive quarter, the stock price of the company fell, after the initial euphoria subsided. One of the main reasons for this can be the fact that the company chose to maintain its full-year guidance for 5% sales growth and 3.5% comps growth, in spite of the solid third quarter performance, and a continued benefit set to be received from the hurricane-related sales and an improving housing market. Moreover, looking at Lowe’s results in isolation shows it was a good performance; however, the same cannot be said when compared with that of Home Depot. The latter’s comps came in at 7.9% in Q3, prompting the company to raise their guidance. Factors such as an unpredictable weather and a tough prior-year comparison were cited by the company as reasons for not improving the full-year outlook. Companies also tend to be more promotional in the holiday quarter, which could pressure the earnings.

We have an $83 price estimate for Lowe’s, which is slightly higher than the current market price. Below are the key takeaways from LOW’s earnings report using our interactive platform:

Omnichannel Drives Growth

Lowe’s has received positive feedback for its omnichannel initiatives, a key factor in driving a 33% online comps improvement. The company has provided an upgraded online shopping experience, with enhanced functionality and optimization for touch and mobile devices. Lowe’s also provides flexible fulfillment options of buy online, pick up in store and buy online deliver from store, besides making it easier for customers to engage with its in-home project specialists to request services. As a result of the omnichannel efforts undertaken by the company, 60% of the online orders are picked up in the store, with 40% of those customers buying incremental products when they go to collect their products. The home improvement retailer has also concentrated on its “Professional Segment” – an area where its competitor Home Depot is currently ahead. Professional customers place larger orders compared to the do-it-yourself segment and serving these customers better can boost revenues for Lowe’s in the long term. As a result of this focus, Lowe’s has been able to narrow its delivery window to a two-hour time frame for its Pro customers.

Hurricanes Cause A Negative Impact On The Margins

As expected, the gross margins of the company trended downwards this quarter, as compared to the quarter a year prior. This was driven by the hurricane-related expenses, which resulted in increased costs for the company, similar to what happened with Home Depot. Moreover, the increased sales on account of the hurricanes were of low-margin items, which further compressed the bottom-line. In addition to these, given the highly competitive environment, Lowe’s was forced to undertake certain promotional activities, such as increased advertising and discounting. The company is also aiming to drive brand loyalty through its MyLowes platform, which is pressuring the margins. This includes 10% off of purchases for active duty personnel and veterans, and free delivery for MyLowes members. These factors will continue to stress the gross margins of the company in the fourth quarter.

To overcome these, the company has undertaken optimization efforts by working closely with vendors to improve their cost and pricing tactics. The acquisition of Maintenance Supply Headquarters also provides an opportunity to improve the margins through higher sales with pro customers.

See our complete analysis for Lowe’s.

Have more questions about Lowe’s? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Lowe’s

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