The growth of home improvement companies is directly proportional to the housing market cycles, which in turn is closely related with the prevailing economic conditions. A tremor at one end obviously makes its rippling effects evident on the other end too.
Remember the subprime crisis, which destabilized the U.S. housing market? Thus Lowe’s Companies Inc. (NYSE:LOW - News), being the world’s second largest home improvement retailer, will have to walk the tight rope.
The Company Counts Upon
Lowe’s boasts a proven strategy of investing in stores to enhance customer-shopping experience by improving point-of-sale and directional signage, and adding more product selection. The company’s sustained focus on Everyday Low Prices, New Lower Price, Go Local and Specialty Sales initiatives, have helped it to grow its market share.
Giving itself a new face lift, Lowe’s replaced its old tag line “Let’s Build Something Together” with a new one “Never Stop Improving,” reflecting the company’s new brand strategy and endeavor for improving and developing innovative ideas. The company also launched an online tool, “MyLowes,” to aid consumers better manage their homes and other remodeling projects. We believe that these initiatives would help the company in gaining competitive advantage.
The company also recently acquired an online home improvement and lifestyle products retailer, ATG Stores, to expand its presence in the online retailing platform. ATG carries 3.5 million products from over 3,300 manufacturers.
Focus on Stores
Lowe’s in a strategic move has closed 20 underperforming stores across 15 states in the U.S. in October 2011, as the company dipped investments in certain sections of the business that no longer contributed significantly to its growth. The company now expects to open 25 new stores during fiscal 2011.
We appreciate the company’s rational approach of cutting new store growth targets and pruning costs, given the sluggish consumer environment and the trends in the housing market. Lowe’s opened 42 stores in 2010, significantly down from 62 stores opened in 2009 and 115 stores opened in 2008.
The company’s expansion in the regions it already serves could cannibalize its sales performance and lower traffic counts, at its existing stores in the area. Consequently, this may have a negative impact on the company’s overall performance. So, it must be cautious, while opening new stores.
A Look at Guidance
Lowe’s expects fourth-quarter 2011 earnings in the range of 20 cents to 23 cents a share. For fiscal 2011, management expects earnings between $1.57 and $1.60 per share, excluding charges of 20 cents related to store closings and discontinued operations. The current Zacks Consensus Estimate for the fourth quarter and fiscal 2011 are 23 cents and $1.61 per share.
Management now expects sales to increase approximately 8% in the fourth quarter and between 2% and 3% in fiscal 2011. Earlier, Lowe’s had forecasted fiscal 2011 sales to increase by approximately 2%. Lowe’s expects comparable-store sales to remain flat or up 1% in the fourth quarter but to decline by 1% in fiscal 2011.
Challenging Economy & Competition
Heavy job losses and reduced access to credit have lead to a sharp fall in consumer discretionary spending on big-ticket items. With the global economic environment still struggling, we believe that spending on big remodeling projects will likely remain under pressure until the housing market stabilizes and consumer-spending rebounds.
Lowe’s in the home improvement retailing business faces stiff competition from The Home Depot Inc. (NYSE:HD - News), Sherwin-Williams Company and other home supply retailers on attributes such as location, price and quality of merchandise, in-stock consistency, merchandise assortments, and customer service. This may weigh upon the company’s results.
Closing Statement
We believe that Lowe’s remains on track to develop innovative ideas to adapt to the ever changing demands and preferences of its consumers. The company is also rationalizing its capital expenditures, including store-remerchandising efforts, to improve its return on investment. These are well reflected through its Zacks #2 Rank that translates into a short-term Buy recommendation. However, we prefer to maintain our long-term Neutral rating on the company.
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