Weak Margins Result In A Disappointing Quarter For Lowe’s
A revenue and comparable sales beat for Lowe’s (NYSE:LOW) were not enough to halt the stock price decline. The company reported revenues of $15.49 billion, and comparable sales growth of 4.1%, beating consensus expectations of $15.33 billion and a 3% rise. However, weak margins resulted in a big EPS miss – of 13 cents. Lowe’s reported a gross margin of 33.73% of sales versus 34.41% a year ago, the lowest level of profitability in FY 2017. Although Home Depot had set a pretty high standard, Lowe’s performance was nowhere close to matching that of its biggest competitor, and did nothing to close the gap between the two giants in the home improvement industry. Even for FY 2018, the company has guided for a 4% growth in sales, 3.5% improvement in comps (deceleration compared to FY 2017), with a flat gross margin and continued decline in the operating margin. This reflects another point of difference between the two companies – Home Depot expects an improvement in the margins for FY 2018.
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Revenue Growth Driven By Its Omnichannel Segment
Lowe’s has received positive feedback for its omnichannel initiatives, a key factor in driving a 28% online comps improvement in the fourth quarter, and 34% for the year. The company has provided an upgraded online shopping experience, with enhanced functionality and optimization for touch and mobile devices. The company’s MyLowe’s platform has also helped to drive brand loyalty and build deeper relationships with customers, a consequence of which has been that MyLowe’s members spend approximately 35% more on average than non-members. 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 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 focused 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 its efforts, Lowe’s has been able to narrow its delivery window to a two-hour time frame for its Pro customers.
Lowe’s Chasing Market Share At The Expense Of Margins
A number of factors put pressure on the margins of the company:
1. An outperformance of the company’s expectation in the appliance category, which resulted in market share gain, had a negative impact on both the mix and rate from a margin perspective.
2. The company focused on getting more competitive, and increasing its value perception among consumers, in order to gain market share. These actions were started in the second quarter and continued until the fourth quarter, which put an increased pressure on the margins.
3. Lowe’s integration with RONA, a company it acquired in 2016, resulted in some “accounting harmonization” which had a further impact on the margins.
See our complete analysis for Lowe’s.
Have more questions about Lowe’s? See the links below.
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