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Few Reasons Why Lowe’s Future Looks Bright

July 17, 2014 | About:
Suravi Thacker

Suravi Thacker

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The retail industry is going through a difficult phase. Survival has become largely difficult in an environment where there are innumerable problems. An uncertain economic environment, restrained customer spending, and cost inflation were already making life miserable when colder winters made it even worse. However, there is a league of retailers who have benefited from this situation.

Severe winter conditions helped the home improvement retailer Lowe’s Companies (LOW), which had been suffering from low demand for quite some time now. Lowe’s posted decent third quarter earnings, but were slightly below the Street’s expectations. Let us take a look at it in detail.

A Surprising Recovery

Revenue jumped 2.4% to $13.4 billion, driven by high demand due to the recovery in the housing market, which made customers to rush to Lowe’s stores. Also, there was a huge footfall after the snowstorms, since people needed products to deal with the impact of the storms and clean the damage.

However, this was not the only reason that led to the top line increase. The company’s efforts on the product line, as well as its prices, helped it see better days. Lowe’s strategy of providing perpetual low prices attracted customers, and this will help the company in the days to come. The company expects to reap its benefits from its low pricing strategy by the middle of next fiscal year.

Moreover, Lowe’s efficient management of costs drove adjusted earnings north by 15.6%, clocking 61 cents per share. Also, its gross margin expanded slightly to 35.5% over last year.

Lowe’s is not the only one to benefit from the snowstorms and a recovering housing market. The housing market has been in a recovery phase with better prices and demand, and Home Depot (HD), the leading player in the industry, is already showing results that affirm the recovery. Home Depot registered a great quarter with a 2.9% jump in the top line and 12.5% rise in earnings. The after effects of harsh winters led to higher sales for Home Depot also. Also, it registered a commendable same-store sales growth of 2.6%, which is way above Lowe’s metric of 0.9%.

Points to Ponder

Though Lowe’s is not as strong as its rival Home Depot and has had a tougher time recovering from the turbulent economy, it has some initiatives in place that will help it grow. Firstly, it has been working on its product line in order to provide more varieties to its customers at a low price. Also, it is ramping up its promotional efforts so that it can attract more and more customers to its stores. Along with that, it has been expanding its reach. It plans to open new stores in the months to come, which will further boost its revenue.

Additionally, the company’s efforts are not limited to products and pricing. It is revamping its store layouts as well. The company has segregated its stores into four clusters. Each cluster caters to a particular type of need, such as size, color, and so on. This helps in making a customer's shopping experience easier. Lowe's has already started the initiative and plans to expand it to more stores in the future.

Winding Up…

These potential benefits and the expected sales from customers’ recovery from snowstorms should push Lowe’s revenues to higher levels. Moreover, this performance has been quite a relief to investors after continuous disheartening results due to lower housing activities. In addition, it seems like the housing market is in for a good time ahead, a fact that was lent further credence by positive results from homebuilder PulteGroup (PHM). The company saw a 2% jump in orders in its last reported quarter, while order backlog went up to 7,199 homes, which is worth $2.4 billion since average selling price increased by 10%.

These metrics from one of the biggest homebuilders in the country suggests that housing is finally getting back on its feet, which in turn means good news for Lowe's. Hence, backed by a recovering industry, Lowe's looks like an intriguing investment and is expected to perform well in the quarters to come. Investors should give this company a thought.


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