Being the world’s second largest home improvement retailer, Lowe’s Companies Inc. (LOW) boasts a proven strategy of investing in stores to enhance customer-shopping experience by improving point-of-sale and directional signage, and adding more choices in product selection.
The company’s sustained focus on Everyday Low Prices, New Lower Price, Go Local and Specialty Sales initiatives have helped it to boost its market share.
Lowe’s, which competes with The Home Depot Inc. (HD), expects fiscal 2011 earnings between $1.60 and $1.72 per share. Management projects sales growth between 2% and 5%, and comparable-store sales between 1% and 2% for the year.
We appreciate Lowe’s rational approach of cutting new store growth targets, given the sluggish consumer environment and trends in the housing market. Lowe’s opened 42 stores in 2010, significantly down from 62 stores opened in 2009 and 115 stores opened in 2008. The company now expects to open 25 to 30 new stores during fiscal 2011.
In the coming years, Lowe’s plans to concentrate more on private label brands. We believe that greater focus on private label products should facilitate margin improvement.
The company is also actively managing its capital. Lowe’s is rationalizing its capital expenditures, including store-remerchandising efforts, to improve its return on investment. As a result, the company expects to generate substantial future cash flows. The company’s strong liquidity will position it to drive future growth.
However, heavy job losses and reduced access to credit have lead to a sharp fall in consumer discretionary spending on big-ticket items. Although the economy is showing signs of revival, we believe that spending on big remodeling projects will likely remain under pressure until the housing market stabilizes and consumer-spending rebounds.
Moreover, the company’s expansion in the regions it already serves could cannibalize its sales and decrease traffic count at its existing stores. Consequently, this may have a negative impact on the company’s overall performance. During fourth-quarter 2010, new store cannibalization lowered comparable-store sales by about 35 basis points.
Given the pros and cons, we prefer to have a long-term ‘Neutral’ rating on the stock. Moreover, Lowe’s holds a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation, and correlates with our long-term view.
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