Home improvement retailer
Lowe's
(
LOW
) has seen its stock prices stagnate over the last six-month
period. Over the last year, the company has fared better with a 35%
increase. This, however, is lower than the performance of its
larger rival Home Depot which recorded a 60% increase over the past
year. Lowe's mediocre performance vis-a-vis Home Depot (
HD
) can be attributed to both internal and competitive factors.
However, as the company realigns its strategy to improve
profitability and with the recovery in the US housing market, we
expect Lowe's performance to improve which should in turn uplift
its stock value.
See our complete analysis of Lowe's here
One may say that Lowe's has been its own enemy. The company has
followed a policy of aggressive store expansion with the
number of stores increasing from around 1,300 in 2007 to more than
1,700 in 2011. This strategy seemed to be working well until the
housing bust of 2008-2009. Despite clear indications of declining
demand for home improvement products, the company continued with
this expansion policy, leading to a stark decline in margins over
the period 2009-11. Despite a u-turn on this policy, the company's
historical performance seems to be playing a significant role in
weighing down its performance in the recent past. Investors in the
segment clearly see a greater sense in parking their money in the
more-profitable Home Depot. Intense price competition within the
home improvement retailing industry, culminating in Lowe's
'Everyday Low Prices' campaign, hasn't exactly helped boost margins
either.
Home Depot has posted consistent results over this financial
year. The company saw a strong increase in earnings in Q1 and
stable growth in Q2. It continued this trend into the third
quarter, posting higher-than-expected earnings as well as profits
that beat previous year's results. Now, does this spell more bad
news for Lowe's investors or is there a silver lining to this dark
cloud?
The Past Has Passed
The first thing to keep in mind while looking at Lowe's is how
much its faulty strategies of the past are weighing on it today,
and how much its core strategy has changed since then. Since 2011,
the company has put a halt to its capex, especially for new store
openings. For the first time in eight years, the company reported a
decrease in the number of total stores in 2011. Although this
decline is marginal, it underlines an important shift in the
company's overall strategy from in-store sales to focusing on
delivering a better online experience to customers. ((Lowe's:
From Customer Data to Customer Loyalty, Information-Management.com,
November 2011))
The company launched its iPhone Application in 2011 and has
greatly improved upon its online 'MyLowes' shop, delivering an ever
greater number of services to customers over the Internet. This
move away from an in-store to an online model will go a long way in
driving profit margins while increasing customer convenience and
hence loyalty.
Riding The Housing Recovery Wave
The effect of the recovery of the US housing market also cannot
be underestimated in its ability to provide a boost to home
improvement retailers. The housing downturn of 2008-09 had a
significant negative impact on Lowe's, leading to a decline in
top-line and increasing costs. As the real estate market recovers
and new construction picks up, this will have a healthy impact on
Lowe's core profits and top-line growth in the long
run. ((Home Depot gains hint at housing market recovery,
CSMonitor.com, November 2012))
A Perfect Storm for Retailers
Bad news on the weather front means good news for home
improvement retailers. Hurricane Irene had a positive impact on
sales for both Home Depot and Lowe's in the previous year with the
provided upturn spread over a surprisingly long period of time as
recovery from the disaster was slower than expected. A similar
effect may be estimated for Sandy, which has caused more damage to
property (estimated $20 billion) than Irene had ($16 billion). This
is likely to drive demand in the short run, providing a much needed
boost to top-line growth.
Investors can hence assume that the worst should be pretty much
over for Lowe's. As the company realigns its focus on long-term
profitability, we could see the gradually improving performance of
the company reflect in the value of its stock. Hopefully, that day
will come sooner than later.
We have a $33 Trefis price estimate for Lowe's stock, 5% ahead
of the current market price.
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Price at Trefis