The performance of home improvement companies is directly proportional to the housing market cycles, which in turn is closely related with the existing economic conditions. A tremor at one end obviously makes its rippling effects evident on the other end, too. Remember the subprime crisis that destabilized the U.S. housing market?
So, Lowe’s Companies Inc. (LOW), being the world’s second largest home improvement retailer, has adopted a balancing strategy in dealing with the situation.
Drivers Behind Growth
Lowe’s boasts a proven strategy of investing in stores to enhance customer-shopping experience by improving point-of-sale and directional signage, and adding more product selection. The company’s sustained focus on Everyday Low Prices, New Lower Price, Go Local and Specialty Sales initiatives, have helped it to grow its market share.
Giving itself a new face lift, Lowe’s replaced its old tag line: “Let’s Build Something Together” with a new one: “Never Stop Improving,” reflecting the company’s new brand strategy and endeavor for improving and developing innovative ideas. The company also launched an online tool, “MyLowes,” to aid consumers so they can better manage their homes and other remodeling projects. We believe that these initiatives would help the company in gaining a competitive advantage.
The company also recently acquired an online home improvement and lifestyle products retailer, ATG Stores, to expand its presence in the online retailing platform. ATG carries 3.5 million products from over 3,300 manufacturers. ATG Stores’ robust online retailing platform will help Lowe’s to target new audience and provide better customer services, while increasing the number of items on Lowes.com by two times in 2012.
Lowe’s is actively managing its capital. The company 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. The company’s long-term goal is to improve profitability and attain 10% operating margin by 2015.
Focus on Stores
Lowe’s, in a strategic move, has closed 20 underperforming stores across 15 states in the U.S. in October 2011, as the company dipped investments in certain sections of the business that no longer contributed significantly to its growth. The company now expects to open 10 new stores during fiscal 2012.
The company has been rational while opening new stores given the sluggish consumer environment and the trends in the housing market. However, it must be cautious that expansion in the regions it already serves; otherwise they could cannibalize sales performance and also lower the traffic counts at its existing stores in the area. Consequently, this may have a negative impact on the company’s overall performance.
Healthy Results, Guides ’12
Lowe’s recently posted better-than-expected fourth-quarter 2011 results. The quarterly earnings of 29 cents a share beat the Zacks Consensus Estimate of 23 cents and jumped 38.1% from 21 cents earned in the prior-year quarter. The fourth quarter earnings also exceeded management’s guidance range of 20 cents to 23 cents a share.
Net sales for the quarter climbed 11% to $11,629 million from $10,480 million delivered in the year-ago quarter. Net sales also comfortably surpassed the Zacks Consensus Estimate of $11,334 million. The company had earlier forecasted sales to increase approximately 8% during the quarter.
Comparable-store sales during the quarter rose 3.4%. Management had earlier predicted comparable-store sales to remain flat or up 1% in the quarter.
Lowe’s said that it now expects fiscal 2012 earnings between $1.75 and $1.85 per share. Management now expects sales to rise in the range of 1% to 2% for the year. The company expects comparable-store sales to increase between 1% and 3% during the year.
Challenging Economy & Competition
Job losses in the recent past and reduced access to credit have led to a sharp fall in consumer discretionary spending on big-ticket items. With the global economic environment still not completely out of the woods, we believe that spending on big remodeling projects will likely remain under pressure until the housing market stabilizes and consumer-spending rebounds.
In the home improvement retailing business, Lowe’s faces stiff competition from The Home Depot Inc. (HD), Sherwin-Williams Company and other home supply retailers on attributes such as location, price and quality of merchandise, in-stock consistency, merchandise assortments, and customer service. This may weigh upon the company’s results.
Closing Statement
We believe that Lowe’s remains on track to develop innovative ideas to adapt to the ever changing demands and preferences of its consumers. The company is also rationalizing its capital expenditures, including store-remerchandising efforts, to improve its return on investment.
These are well reflected through its Zacks #2 Rank that translates into a short-term Buy rating. However, we prefer to maintain our long-term Neutral recommendation on the company.
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