) is the world's second largest retailer of home improvement
products after Home Depot (
). Through its more than 1,700 stores spread across the US, Canada
and Mexico, Lowe's offers a wide range of home improvement products
and installation services to individual home owners as well as
We estimate that Lowe's Plumbing, Electrical, & Kitchen
segment is the single largest value driver of the company's
operations, generating close to 33% of
our estimated $25.87 stock value for Lowe's
, which is in line with the current market price.
Appliances Picking Up…
Lowe's reported its 3Q FY10 results showed positive results with
YOY sales for the quarter increasing by nearly 2%. For the first
nine months of fiscal 2010, Lowe's reported sales increase of
In addition to an increasing trend of do-it-yourself (DIY) for
tackling home improvements rather than hiring someone, an increase
in market share in appliances, has helped to boost Lowe's sales
this year. The appliances segment is a part of our Plumbing,
Electrical, & Kitchen division for Lowe's.
) has been losing market share to rivals Lowe's and Home Depot in
the appliance segment which includes items such as refrigerators,
washer-dryers, gas ranges and ovens. In addition to increasing its
product range and opening more stores, Lowe's gains
leverage in attracting shoppers, especially female customers, as
its stores are brighter, cleaner and better maintained.
Last year, Lowe's share of the US appliance market rose nearly 4
percent to $4.54 billion, or about a fifth of the total, according
to This Week in Consumer Electronics.
Currently, we estimate Lowe's North America Plumbing,
Electrical, & Kitchen Market Share to increase from 17% in 2009
to almost 19% in 2017.
…Focusing on Margins
With consumer spending and the housing market being slow to pick
up, another initiative taken by Lowe's is to improve margins.
Lowe's executives said they will focus on margin growth initiatives
like offering more private label goods and making structural
changes to become more competitive on prices on a local level. The
company also has installed a new inventory management software to
help individual stores keep better track of prices.
Plumbing, Electrical & Kitchen profit margins (EBITDA
margin) declined from below 14% in 2006 to around 10% in 2009 due
to increasing expenses and pricing pressure to maintain market
share during the economic slowdown. We believe that as Lowe's
enters 2011 with consumers spending cautiously, the pricing war
among home improvement retailers could put downward pressure on its
margins. We forecast the decline in Lowe's EBITDA margin to
continue, with the Plumbing, Electrical & Kitchen EBITDA
falling to about 9% by 2017.
However, the above short term trends (Lowe's gaining market
share in the appliance segment and its margin growth initiative)
have the potential to help Lowe's gain more market share as well as
sustain margins for its Plumbing, Electrical, & Kitchen
division in the long run.
If the Lowe's North America Plumbing, Electrical, &
Kitchen Market Share increases to around 20% by 2017, and the
Plumbing, Electrical & Kitchen EBITDA Profit Margin stays at
around 10% by 2017, there can be a 7-8% upside to our estimate
for its stock price.
See our full analysis for Lowe's here.