) is a home improvement retailer which operates primarily within
the United States. The company operates through a network of around
1,700 big-box stores (megastores) that stock all sorts of
home-related items, ranging from electrical appliances, plumbing
equipment to wallpapers and flooring materials. The company
is the second largest retailer of its kind after close rival Home
), which has a chain of around 2,000 stores in the United
See our complete analysis of Lowe's here
A Top Line View
Since Lowe's offers products for home development and
improvement, the company's earnings are closely tied to the state
of the U.S. housing market, especially new home constructions. The
correlation can be seen quite clearly in the company's top line.
Lowe's earned around $48 billion in revenue in 2008, just before
the big housing crash. Year 2009 saw revenues decline to $47
billion. With the gradual recovery of the housing market
2010 onwards, the company's top line has also moved upwards,
figures for 2011 stood at $50 billion.
The decline in the housing market caused a serious crunch in the
total spending available for Lowe's and Home Depot to grab during
2009-11 period. Lowe's turned to innovative strategies during this
period of uncertainty, as it looked to wrest market share from
its larger rival.
Some key strategic steps completed by Lowe's during this period
1. Shift towards an online store model with
: In 2011, Lowe's launched a new online shopping platform called
'MyLowes', which allows consumers to set up online profiles in
order to manage purchases, track purchased goods and work on home
development ideas, through collaborations with Lowe's experts. The
company also launched mobile applications for the online
2. Introduction of new pricing model 'Everyday Low
: Instead of relying on traditional promotions and pricing
incentives such as discounts, the company moved to a new pricing
model with 'Everyday Low Prices'. Through this program, the company
effectively offers the lowest possible prices on stocked goods.
Lowe's guarantees consumers that they will offer 10% lower prices
on all products that customers find in rival stores.
3. Improving in-store shopping experience:
Realizing that the economic downturn would mean that more customers
would want to start new home projects on a do-it-yourself (DIY)
basis, Lowe's has been focusing on improving in-store experience.
The company has focused customer service through staff
training as well as in-store design elements such as product
labeling and aisle arrangements.
Despite such internal reinventions, Lowe's has performed
relatively poorly compared to Home Depot during the period 2009-11.
Q3 2012 marked the eight straight quarter in which Lowe's trailed
Home Depot in change in same-store sales. This indicates that it
has been losing market share to its rival during the last three
years. One of the key factors holding back Lowe's today is that its
new pricing policy hasn't gone down very well with consumers, who
are more familiar with traditional pricing strategies revolving
around discounts and promotional coupons. Home Depot's wider
network of stores in the U.S. has also allowed it to leverage the
recovery in the housing market, in a more effective way than
Compared to Lowe's 3% year-over-year revenue growth in 2011,
Home Depot grew by around 4%, that too on a base that is larger by
around $20 billion. However, going forward, we are optimistic about
Lowe's prospects vis-a-vis its key competitors. As consumers become
more familiar with the new pricing strategy and the 'MyLowe's'
platform, we expect the company to become more effective in
leveraging the rebound in the housing market. This should arrest
the company's decline in market share in the near future.
A Bottom Line view
Facing a stagnant market and declining revenues, Lowe's
focus should, ideally, have been on reducing expenses during the
market turmoil of 2009-10. But the company did not fare too well in
this aspect. Despite flagging sales, Lowe's continued to pump in
capital into new stores, well into 2010. The company added around
100 stores during the two-year period even as average revenue per
store dropped to levels which were 10% lower than 2008. As a result
of this, the company's operating margins fell by 1.5 percentage
points even as Home Depot improved its own margins by around 3%
over the same period.
This wrong turn was corrected in 2011, when the retailer finally
halted its store expansion policy and even closed down 4 stores in
the US. The launch of Lowe's online platform also provided the
retailer with enough confidence to shift away from its traditional,
capital-intensive model. Moreover, since 2010, the company has also
made significant progress through various restructuring programs
aimed at improving inventory management and ensuring speedier
delivery of products and services. Such efforts finally seem to be
paying off for the company, as it recorded a 76% rise in profits in
Q3 2012. Going forward, we expect the company's revised policy to
continue to pay rich dividends for investors.
What The Future Holds
As we have mentioned, our outlook for the company is largely
positive, and we expect Lowe's to continue to improve upon past
results. As customers become more comfortable with Lowe's new
pricing model and the company's corrections regarding store
expansion policies pick up pace, we expect both the bottom line and
the top line to steadily improve in the future. The company also
has international expansion plans. It is setting up stores in
Mexico in order to earn its fair share of the country's booming
housing market. The company has also set up stores in Australia in
partnership with Australian retailer Woolsworth.
How these developments work out for the company remains to be
seen, but its performance in the domestic market looks a surer
picture with the continued resurgence of the housing market. Home
Depot, which has consistently outperformed Lowe's over the last two
years, should start feeling a lot more nervous now.
We have a Trefis price estimate of $36 for Lowe's stock,
which is in line with the market price.
a Company's Products Impact its Stock Price at Trefis