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Innovation and a Better Approach to Customers Are the Main Growth Drivers for This Retailer

February 24, 2014 | About:

Lowe’s Companies Inc. (LOW) is the second largest home improvement retailer in the U.S., following leading player Home Depot Inc. (HD). The company operates over 1,800 locations in the United States, Canada and Mexico, offering products and services for home building, remodeling, repair and maintenance. The firm caters to three customer categories, namely do-it-yourself and do-it-for-me customers, as well as commercial business clients. Its stores represent a one-stop shop for customers looking to purchase all the necessary merchandise to complete their projects. Its vast product portfolio includes high-quality national trademarks as well as private brands. Lowe’s offers its products in stores as well as online through its site Lowes.com. The company captures around 13% of the domestic market share.

A Wide Economic Moat

Many consolidated strengths have earned Lowe’s the wide economic moat that it boasts. For one, the scale of its business gives the company strong purchasing power that translates into a low-cost position. This advantage is further empowered by the implementation of an automated distribution network that puts vendors, distribution centers and stores on one IT platform, driving operational efficiencies. Part of the cost savings attained are then passed on to consumers in the form of everyday low prices. This boosts customer loyalty, which is also the result of years of efficient problem-solving customer service, through a staff with a strong knowledge base that clients rely on.

An Ever Improving Business

Following its new tagline “Never Stop Improving,” Lowe´s continues to develop initiatives in order to enhance shopping experience to benefit from better customer engagement. Along these lines, the firm is widening its omni-channel reach through the implementation of Wi-Fi for customers and iPhone technology for servicing associates. Thus, it launched an online tool “MyLowes” to help customers achieve a better management of their projects. Furthermore, since additional growth is likely to come from services (mainly installations) Lowe’s has redirected labor hours from stocking to its service segment. Additionally, the company also seeks to improve its logistics through better route planning and delivery scheduling.

Goals and Expansion

As a result of its strategy, the company has achieved average returns on capital of 9.3% over the past five years. Moving on, its goals for 2015 include a ROIC of 17%, earning per share of $3.44 and operating margins of 9.7%.

To this aim, the aforementioned initiatives add to the firm’s closing of underperforming locations and the recent acquisition of Orchard Supply Hardware Stores. This represents an important opportunity for the company, since Orchard´s smaller-format locations, allocated in key areas of the California market, will reinforce the firm’s market positioning and will allow it to capitalize on under-penetrated markets.

A Better Outlook

The company’s earnings in the fourth quarter of fiscal 2013, which will be reported in the next days, are expected to be of $0.31 per share, representing an increase of 19% in relation to the prior year, and revenues are expected to reach $11.7 billion, 6% higher than the year before. If results support assumptions, Lowe’s will be reporting the third consecutive quarter of revenues and earnings growth, which didn’t happen since 2012.

Lowe’s Companies’s stocks trade at 22.40 its trailing earnings, a slight premium compared to the industry median of 18.00. However, return on equity showcases a higher 14.10% compared to its peers’ average of 9.10% and dividend payout is at a rate of 0.40 compared to a lower 0.32 average for its competitors. Investment guru Julian Robertson (Trades, Portfolio) recently incorporated Lowie’s to its portfolio, following my bullish feeling about the firm’s growth potential.

Disclosure: Vanina Egea holds no position in any stocks mentioned.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


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