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Robert Stephens, CFA
Robert Stephens, CFA
Articles (215) 

Lowe’s Growth Potential Suggests It Is Undervalued

The company’s strategy is set to enhance its financial performance

August 23, 2019 | About:

Lowe’s Companies Inc. (NYSE:LOW)'s investment in new technology could increase its efficiency and enhance its competitive position.

The home improvement retailer is investing in its omnichannel growth prospects, as it seeks to provide a superior customer experience relative to its sector peers. This could boost its stock price following a 1% gain in the last year.

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Investing for growth

The company’s continuing investment in its staff is differentiating its offer through improved customer service levels. For example, its investment in over 600 assistant store managers and 5,500 department supervisors led to 120 additional customer-facing hours per store per week in the most recent quarter. This provides improved departmental coverage and expertise for the company’s customers. It contributed to a 600-basis-point increase in Lowe’s customer service scores in the second quarter of the year.

The business is investing in new technology in order to improve its efficiency. In the last quarter, it deployed new mobile devices for its store sales. These reduce tasking hours by providing real-time data to the company’s store managers that enables them to evaluate productivity by department. In addition, Lowe’s is completing the rollout of a new labor scheduling system in the current fiscal year that will allow it to more accurately predict customer demand by time of day, day of week and department. This will allow the company to more accurately align labor hours with customer traffic to reduce its payroll expense.

Refreshed strategy

Lowe’s is investing in its omnichannel business in order to improve its user experience. For example, it replatformed its website to the Cloud in the most recent quarter. The company expects this to improve its website speed, as well as allow it to offer enhanced navigation functions and a simpler checkout process. It is currently constructing a new global technology center that will house 2,000 additional technology professionals when it opens in 2021. The center is expected to allow the business to compete more effectively in the e-commerce market, where growth of over 8% per annum is forecast over the next five years.

The company is seeking to improve its margins through the integration of its Boomerang retail analytics platform. This will allow Lowe’s to utilize the platform’s technology when making merchandising decisions. It will be integrated with a new pricing management system that the company expects to have in place by the end of the current year. This will provide the business with improved data on the impact of its pricing actions, and is expected to enhance its competitive advantage versus sector peers.

Possible risks

The retailer’s online comparative sales growth of 4% in the most recent quarter was below its forecast. Demand for its products may continue to be below the company’s expectations, with consumer sentiment currently at its lowest level since the start of the year. Alongside this, Lowe’s reported negative comparative sales growth in Canada in the last quarter. Its performance in Canada was negatively impacted by its ongoing RONA integration, which it expects to act as a drag on its sales growth in the short run.

Lowe's disappointing online sales performance last quarter was partly caused by its decision to intentionally slow the number of new products that were added to its website. It decided to do this in order to address system-related issues that had previously hurt its overall productivity. It has now resolved those issues, and expects its online sales to improve in the future. The company also removed a range of less profitable products from its website. While this caused its sales performance to deteriorate, the business expects the decision to catalyze its profitability in the long run.

Outlook

The stock’s earnings per share are forecast to rise 18% in the next fiscal year. Its forward price-earnings ratio of 19 suggests that it offers good value for money.

The retailer’s focus on improving the customer experience, becoming more efficient and boosting its omnichannel growth could lead to a rise in its stock price over the long run.

Disclosure: the author has no position in any stocks mentioned.

Read more here: 

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Why Mondelez Has Growth Potential 

Why Choice Hotels Is a Buy 

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