Long Winter Cools Lowe’s First Quarter Results
Unseasonably cold weather played a dampener in Lowe’s (NYSE:LOW) first quarter results, when the company missed consensus expectations on both revenue and earnings. The poor performance in the quarter, nevertheless, will not have an impact on the full year results. The company, in fact, revised its revenue and gross margin guidance slightly upward, though that was solely a result of the adoption of the new revenue recognition standard. For FY 2018, Lowe’s has now guided for a 5% growth in sales, 3.5% improvement in comps (deceleration compared to FY 2017), with a 60 basis points improvement in gross margin and continued decline in the operating margin.
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Factors That May Impact Future Performance
1. Colder Than Normal Weather Conditions: Poor weather conditions during the month of April in some parts of the country had a considerable impact on the traffic, as well as on the sales of outdoor items, particularly in the gardening category. This same factor resulted in Home Depot reporting a miss on analyst estimates for revenue in their recently reported first quarter results, when snowy conditions resulted in just a 2.2% rise in comparable sales growth in April. Lowe’s has a highly seasonal business, with 35% of Q1 and 40% of Q2 sales historically driven by outdoor categories. Consequently, the weather had a significant impact on the comps. In the first quarter for Lowe’s, the comps improved 0.6% for the company, lower than the 3% anticipated by analysts. On a more positive note, the company has stated that the comps in May are in the double-digits.
2. Focus On Pro-Customers: Professional customers place larger orders compared to the do-it-yourself segment, and better serving these customers can boost revenues for Lowe’s in the long term. While the recovery in the housing segment has benefited players such as Home Depot and Lowe’s, the latter’s growth has not been as stellar, primarily due to its focus on the do-it-yourself consumer segment. While the do-it-yourself segment is lucrative and accounts for the bulk of Lowe’s revenues, these customers are small ticket buyers and many are just one-time customers. On the other hand, pro-customers account for only 30% of Lowe’s revenues, but they enter into big-ticket transactions and are usually repeat customers. Keeping this in mind, the company has been focused on these customers, and was rewarded in the first quarter with accounts above the company average.
3. Strong Macroeconomic Conditions: Unemployment is at its lowest since 2000, and wages are improving. Although interest rate hikes make mortgages more expensive, on the whole, it is indicative of a strong economy. These factors signal a solid U.S. economy, and have given rise to supportive housing fundamentals. This bodes well for a company like Lowe’s that is heavily reliant on the improvement of the housing industry.
4. Digital Growth: Comps improved 20% on the company’s website, which now accounts for 5% of the total sales. Lowe’s intends to continue upgrading the shopping experience, with features such as optimized search capability, expanded assortment, faster site speed, improved checkout, and next day delivery. 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. We expect strong growth from this segment to continue.
5. Stabilizing Gross Margins: Lowe’s has implemented new pricing and promotion analytics tools to ensure that the company is “competitive on highly elastic traffic driving products while increasing profitability across less elastic items.” This factor played a role in the stable gross margins witnessed in the quarter. The metric also benefited from the adoption of the new revenue recognition standard. On the other hand, increased transportation costs had a negative impact on the gross margin. The company has guided for a gross margin expansion of 60 basis points for this year, along with 40 basis points of decline in the operating margin, as mentioned earlier.
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