Along with an increase in consumer spending in the U.S., homebuilding activity has also gained momentum as the job market has improved, and there is a drop in unemployment levels. Income has also increased, which has given people an increase in the purchasing power. Further, construction of Single Family homes rose 4.52% in October. These facts clearly show that the homebuilders are witnessing happy days. Along with them, the home improvement retailers are having a nice time.
The home improvement retailers also experienced higher sales of their products as new constructions require home furnishings and the need of home décor, which results in better performance. Lowe’s (LOW, Financial) is one of the most prominent players of the industry and is doing pretty well. Its recently reported third-quarter numbers were also attractive as it met the Street’s estimates. This resulted in an increase in the share price of the company. Let’s discuss.
The details of the performance
Revenue for the quarter surged 5.6% to $13.68 billion, over last year. However, analysts were expecting a top line of $13.55 billion. Revenue was driven by higher demand for home improvement products which resulted in same store sales growth of 5.1%. This is higher than the comp sales posted in the second quarter, which stood at 4.4%. Same-store sales growth is an important metric as it reflects the actual growth in sales, excluding the additional sales from the newly opened stores.
However, gross margin shrank 9 basis points to 34.5% during the quarter. This was mainly because of higher cost of sales of the company. Nonetheless, Lowe’s managed to register growth in the bottom line. Earnings jumped to $0.59 per share as against $0.47 per share in the prior year. Further, it was higher than the analysts’ estimate of $0.58 per share.
Points to note
Moreover, growth was helped by factors such as the acquisition of Orchard Supply Hardware in August 2013. Orchard Supply Hardware is a paint, repair and backyard store, which helped in expanding the product portfolio of the company. Also, it helped in expanding the geographical presence of the company in the Western region, where its biggest peer Home Depot (HD, Financial) has a strong presence.
Also, the company is making a number of efforts to grow its revenue from professional customers. Pro customers make 30% of the total revenue and form a significant part of the company. The home improvement retailer also introduced LowesForPros in the second quarter. It is an online platform for professional customers, making it convenient for them to make their purchases. This has gained a lot of popularity and should help Lowe’s generate more sales.
However, it continues to face stiff competition from Home Depot. Even Home Depot reported a great quarter, wherein both the top line and the bottom line jumped despite the data breach problems. Also, it increased its outlook for the year.
Lowe’s also provided a bright outlook, wherein it expects sales to grow between 4.5% and 5% for the year. In addition, same store sales are estimated to grow in the range of 3.5% to 4%.
Summary
Lowe’s future prospects look bright, given the guidance provided by the company and the overall improvement in demand. Also, the company’s strategic efforts to grow its business, through acquisition and introduction of the online portal, look interesting. Thus, this company should make for a safe investment bet.
