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A member of Lowe's Heroes – the retailer's volunteer work force – is painting a garden bed at the Boys and Girls Club Fairfield / Westside on Thursday, September 13, 2018 in Long Beach, California. (Carlos Delgado / AP Images for Boys and Girls Clubs of America)
Lowe's (NYSE: LOW) reported its third quarter results on November 20 and, despite expectations that the consensus was overwhelming on both revenue and earnings, the quarter is not as impressive as it appears at first sight. Revenue growth of nearly 4% exceeded planned sales by approximately $ 75 million; However, the adoption of the new revenue recognition standard, which generated a 143 basis point advantage in sales growth, contributed to this development. At the same time, revenue growth was 1.5%, below expectations. Earnings growth is primarily due to lower tax rates as gross and operating margins continue to decline. Lowe's could not match the performance of its closest competitor, Home Depot, continuing the recent trend of the first to catch up. Home Renovation Retailer faces significant organizational changes, including the appointment of a new CEO and CFO, as well as some disruptions and inventory issues that weighed on sales despite conditions favorable macroeconomic conditions. Although the outlook for the sector remains favorable, the company has reduced its guidance for the year due to the number of strategic initiatives undertaken. Sales and revenue growth should reach 4% and 2.5% (vs. 4.5% and 3% earlier), the operating margin is expected to decrease from 240 to 255 basis points (from a drop of 180 basis points earlier), including 135 to 150 basis points of charges related to its strategic revaluation, and diluted EPS is expected to be between US $ 4.08 and US $ 4.24 (previously US $ 4.50 to US $ 4.60). At the same time, adjusted diluted EPS is expected to be between $ 5.08 and $ 5.13.
We have a price estimate of $ 118 for Lowe's, which is higher than the current market price. We will update our template based on revised guidelines. The graphics were made with the help of our new interactive platform. You can click here for the interactive dashboard sure Lowe's performance in the third quarter and estimate of its fair price, to modify our calculation assumptions to determine its impact on the company's revenues, results and price estimates.
Factors that can affect performance
1. Concentrate on business customers: Professional customers place larger orders than those in the DIY sector. Serving these customers better can increase Lowe's revenue over the long term. While the recovery in the housing sector has benefited such players as Home Depot and Lowe's, the growth of the latter has not been as dramatic, mainly because of its focus on the large consumer segment. While the DIY segment is lucrative and represents the bulk of Lowe's revenue, these customers are small buyers and many are just one-time customers. On the other hand, business customers represent only 30% of Lowe's revenue, but they enter into expensive transactions and are usually regular customers. Keeping this in mind, the company is focused on these customers by introducing professional-focused brands, such as Mapei and Zoeller.
2. Housing market: Despite news of the weak housing market, reflected by the decline in home sales, the company is optimistic about the strength of the home renovation sector. The housing stock in the country seems to be old and in need of repairs and renovations, which should help Lowe's. In addition, home price appreciation also continues to encourage homeowners to participate in discretionary projects. In addition, consumer confidence is high, unemployment is at its lowest level since 2000 and wages are improving. Although interest rate increases make mortgages more expensive, overall they reflect a strong economy. Favorable macroeconomic conditions bode well for a company like Lowe's, which is highly dependent on improving the economy.
3. Digital growth: Comps grew 12% on the company's third quarter website, which represents approximately 5% of total sales. Lowe's intends to continue to improve the buying experience through features such as optimized search capability, extensive matching, faster site speed, improved payment and better pricing. delivery the next day. Lowe's also offers flexible routing options: online shopping, in-store pickup, online shopping, in-store delivery, while making it easier for customers to use home-based project specialists. We anticipate strong growth in this sector once the company has solved inventory issues.
4. Start of hurricane season: As hurricanes should devastate many homes, it will be more necessary to repair them after storms. Such a scenario will stimulate demand for products from home improvement companies such as Home Depot and Lowe's, which address not only the DIY sector, but also professionals in the home renovation / renovation and construction sector. Homeowners are likely to be severely damaged, which will require home improvement equipment and materials. In addition, given that some of the properties in the areas affected by the floods may not be covered by insurance, the people concerned will be forced to pay for the repairs themselves. As a result, the Home Depot and Lowe's core DIY segment is expected to perform a significant portion of the work. Even before the storms, companies could be expected to sell large volumes of low-cost items such as bottled water, tarpaulins and straps, as well as larger sales times such as fans, fans, air conditioners and generators.
5. Lower margins: Gross margin decreased by 157 basis points over the prior year, despite a 170 basis point advantage from the adoption of the new revenue recognition standard. This is mainly due to measures taken to rationalize inventories and eliminate slow or underperforming stock units, which had a negative impact of 180 basis points on the indicator. Other factors that exerted pressure on margins were its customs clearance activities, the closure of its Orchard Supply Hardware business and the increase in transportation costs.
6. Outputs of Orchard's supply equipment: The main reason for the exit of these operations is to focus on the main activity of home improvement. Management plans to close the 99 stores in California, Oregon and Florida, as well as a distribution center by the end of fiscal year 2018, which is one of the factors larger than expected operating margins. During fiscal 2017, Orchard generated a turnover of $ 600 million, but resulted in a $ 65 million slowdown in EBIT. We therefore expect the closure to have a positive impact on the margins of the next fiscal year.
7. Reduced tax rate: Since Lowe's operates primarily in the United States, its effective tax rate has been 35% or more in recent years. Due to the decline in the corporate tax rate from 35% to 21%, as of January 2018, the company should apply a tax rate of 24%, which should be a key factor of Substantial improvement in net profit margin this year.
8. Formwork 51 stores: Earlier this month, the company announced its decision to vacate 20 underperforming stores in the United States and 31 in Canada, as noted earlier, as part of its strategic re-evaluation. These closures should be completed by the end of the exercise. This could be one of the reasons for the decline in profit forecasts provided by the company.
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A member of Lowe's Heroes – the retailer's volunteer work force – is painting a garden bed at the Boys and Girls Club Fairfield / Westside on Thursday, September 13, 2018 in Long Beach, California. (Carlos Delgado / AP Images for Boys and Girls Clubs of America)
Lowe's (NYSE: LOW) reported its third quarter results on November 20 and, despite expectations that the consensus was overwhelming on both revenue and earnings, the quarter is not as impressive as it appears at first sight. Revenue growth of nearly 4% exceeded planned sales by approximately $ 75 million; However, the adoption of the new revenue recognition standard, which generated a 143 basis point advantage in sales growth, contributed to this development. At the same time, revenue growth was 1.5%, below expectations. Earnings growth is primarily due to lower tax rates as gross and operating margins continue to decline. Lowe's could not match the performance of its closest competitor, Home Depot, continuing the recent trend of the first to catch up. Home Renovation Retailer faces significant organizational changes, including the appointment of a new CEO and CFO, as well as some disruptions and inventory issues that weighed on sales despite conditions favorable macroeconomic conditions. Although the outlook for the sector remains favorable, the company has reduced its guidance for the year due to the number of strategic initiatives undertaken. Sales and revenue growth should reach 4% and 2.5% (vs. 4.5% and 3% earlier), the operating margin is expected to decrease from 240 to 255 basis points (from a drop of 180 basis points earlier), including 135 to 150 basis points of charges related to its strategic revaluation, and diluted EPS is expected to be between US $ 4.08 and US $ 4.24 (previously US $ 4.50 to US $ 4.60). At the same time, adjusted diluted EPS is expected to be between $ 5.08 and $ 5.13.
We have a price estimate of $ 118 for Lowe's, which is higher than the current market price. We will update our template based on revised guidelines. The graphics were made with the help of our new interactive platform. You can click here for the interactive dashboard sure Lowe's performance in the third quarter and estimate of its fair price, to modify our calculation assumptions to determine its impact on the company's revenues, results and price estimates.
Factors that can affect performance
1. Concentrate on business customers: Professional customers place larger orders than those in the DIY sector. Serving these customers better can increase Lowe's revenue over the long term. While the recovery in the housing sector has benefited such players as Home Depot and Lowe's, the growth of the latter has not been as dramatic, mainly because of its focus on the large consumer segment. While the DIY segment is lucrative and represents the bulk of Lowe's revenue, these customers are small buyers and many are just one-time customers. On the other hand, business customers represent only 30% of Lowe's revenue, but they enter into expensive transactions and are usually regular customers. Keeping this in mind, the company is focused on these customers by introducing professional-focused brands, such as Mapei and Zoeller.
2. Housing market: Despite news of the weak housing market, reflected by the decline in home sales, the company is optimistic about the strength of the home renovation sector. The housing stock in the country seems to be old and in need of repairs and renovations, which should help Lowe's. In addition, home price appreciation also continues to encourage homeowners to participate in discretionary projects. In addition, consumer confidence is high, unemployment is at its lowest level since 2000 and wages are improving. Although interest rate increases make mortgages more expensive, overall they reflect a strong economy. Favorable macroeconomic conditions bode well for a company like Lowe's, which is highly dependent on improving the economy.
3. Digital growth: Comps grew 12% on the company's third quarter website, which represents approximately 5% of total sales. Lowe's intends to continue to improve the buying experience through features such as optimized search capability, extensive matching, faster site speed, improved payment and better pricing. delivery the next day. Lowe's also offers flexible routing options: online shopping, in-store pickup, online shopping, in-store delivery, while making it easier for customers to use home-based project specialists. We anticipate strong growth in this sector once the company has solved inventory issues.
4. Start of hurricane season: As hurricanes should devastate many homes, it will be more necessary to repair them after storms. Such a scenario will stimulate demand for products from home improvement companies such as Home Depot and Lowe's, which address not only the DIY sector, but also professionals in the home renovation / renovation and construction sector. Homeowners are likely to be severely damaged, which will require home improvement equipment and materials. In addition, given that some of the properties in the areas affected by the floods may not be covered by insurance, the people concerned will be forced to pay for the repairs themselves. As a result, the Home Depot and Lowe's core DIY segment is expected to perform a significant portion of the work. Even before the storms, companies could be expected to sell large volumes of low-cost items such as bottled water, tarpaulins and straps, as well as larger sales times such as fans, fans, air conditioners and generators.
5. Lower margins: Gross margin decreased by 157 basis points over the prior year, despite a 170 basis point advantage from the adoption of the new revenue recognition standard. This is mainly due to measures taken to rationalize inventories and eliminate slow or underperforming stock units, which had a negative impact of 180 basis points on the indicator. Other factors that exerted pressure on margins were its customs clearance activities, the closure of its Orchard Supply Hardware business and the increase in transportation costs.
6. Outputs of Orchard's supply equipment: The main reason for the exit of these operations is to focus on the main activity of home improvement. Management plans to close the 99 stores in California, Oregon and Florida, as well as a distribution center by the end of fiscal year 2018, which is one of the factors larger than expected operating margins. During fiscal 2017, Orchard generated a turnover of $ 600 million, but resulted in a $ 65 million slowdown in EBIT. We therefore expect the closure to have a positive impact on the margins of the next fiscal year.
7. Reduced tax rate: Since Lowe's operates primarily in the United States, its effective tax rate has been 35% or more in recent years. Due to the decline in the corporate tax rate from 35% to 21%, as of January 2018, the company should apply a tax rate of 24%, which should be a key factor of Substantial improvement in net profit margin this year.
8. Formwork 51 stores: Earlier this month, the company announced its decision to vacate 20 underperforming stores in the United States and 31 in Canada, as noted earlier, as part of its strategic re-evaluation. These closures should be completed by the end of the exercise. This could be one of the reasons for the decline in profit forecasts provided by the company.
What is behind Trefis? Find out how this feeds new collaboration and assumptions
For CFO and financial teams | Product, Research and Development and Marketing Teams
More searches on Trefis
Do you like our cards? Explore examples of interactive dashboards and create your own.
