What To Expect From Lowe’s In Q4

by Trefis Team
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114
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Lowe's
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Lowe’s (NYSE: LOW) had a somewhat mixed first three quarters of 2018, as the company managed to grow its revenue by just under 5% in the first 9 months of the year. This performance was primarily attributable to improved comparable sales – as a result of increased average ticket and new store additions, partially offset by compressed customer transaction and adoption of the new revenue recognition standard. Lowe’s is seeing notable organizational changes, including a new CEO and CFO, along with certain disruptions and inventory issues which have pressured sales, despite favorable macroeconomic conditions. Although the industry outlook remains bright, the company has reduced its guidance for the year given the number of strategic initiatives being undertaken. Below we take a look at what to expect from the home improvement retailer in Q4.

We have a $114 price estimate for Lowe’s stock, which is slightly higher than the current market price. Our interactive dashboard on what to expect from Lowe’s in Q4 details our expectations for the company’s earnings. You can modify the charts in the dashboard to gauge the impact that changes in key drivers for Lowe’s would have on the company’s earnings and valuation, and see all of our Consumer Discretionary company data here.

Factors That Should Drive Near Term Growth

1. Focus On Pro Customers: Lowe’s Pro customers place larger orders compared to the do-it-yourself segment, and better serving these customers should boost revenues for Lowe’s in the long term. Despite the recovery in the housing segment, Lowe’s growth has not been on par with Home Depot’s, largely due to its focus on DIY consumers. While the DIY segment is lucrative and accounts for the bulk of Lowe’s revenues, these customers are generally smaller-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 focusing on these customers by introducing Pro-focused brands such as Mapei and Zoeller.

2. Housing Market: Despite news regarding a somewhat weak housing market, reflected in declining home sales figures, the company saw its revenues grow by just under 5% in the first nine months of 2018, as more homeowners chose to renovate their homes rather than selling. The company feels positive about the strength in the home improvement sector, as much of the housing stock in the country is in need of renovation. In addition, home price appreciation continues to encourage homeowners to engage in discretionary projects, which in turn should benefit the likes of Lowe’s and Home Depot. Moreover, unemployment is at its lowest level since 2000, and wages are improving. Strong economic conditions bode well for a company like Lowe’s that is heavily reliant on the improvement of the economy and discretionary spending.

3. Digital Growth: Digital comps have seen sustained improvement throughout the first three quarters and now account for about 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.

4. Exiting Mexico Retail Operations, Orchard Supply Hardware and Non-Core Business: Lowe’s is set to exit the Mexico retail operations, Orchard Supply Hardware business and certain non-core home improvement businesses in the U.S. – Alacrity Renovation Services and Iris Smart Home businesses. The main reason for exiting these operations is to concentrate on the core home improvement business, home furnishing products, and repair and maintenance. As a result of the aforementioned exit strategy, management expects to incur incremental costs of $460-$580 million in Q4 of FY2018. We expect this strategic reassessment to weigh on its margins in the near term. However, its realigned focus and exit from non-core businesses should positively impact the margins from next financial year.

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