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Fool on the Street: Lowe's Plan for Improvement

Here at the Fool, we know you have a life. You work while the sun shines and catch Zs when it doesn't. You may find it hard to keep up with Wall Street events -- corporate "investor conferences," for instance.

These meetings ostensibly benefit investors, but the companies behind them rarely transcribe their proceedings and file them with the SEC. So unless you can attend in person, you're often left out in the cold. That's where our "Fool on the Street" series comes in. We listen in at the conferences so you don't have to.

Last week at its annual analyst and investor conference, Lowe's (NYSE: LOW  ) presented its important updates. Housing woes and other challenges are pummeling near-term trends at the home-improvement giant. However, the company doesn't expect these pressures to knock it down for the count, and it has a long-term plan to expand its status as the eighth-largest retailer in the United States.

"Unexpected pressures"
Lowe's certainly has been affected by the housing bust -- although clearly it is not alone. Management mentioned that so-called experts and economists can't describe the extent of the fallout, which affects home improvement firms such as Lowe's and Home Depot (NYSE: HD  ) , homebuilders like KB Home (NYSE: KBH  ) and Toll Brothers (NYSE: TOL  ) , and financial institutions including Citigroup (NYSE: C  ) .

The company stated it won't try to predict the market, as the housing industry's direction is difficult to foresee, and it's virtually impossible to know when it will reach the bottom. It reported that 12 of its 22 regions had positive comps has year, displaying that there are areas of the country that are still experiencing solid sales and are growing despite housing woes. Of course, the usual-suspect markets such as Florida and California had such dismal performances they dragged down the overall comps for the company.

A three-pronged growth strategy
Lowe's expects near-term difficulties to lead to earnings that are "down slightly" for this year on negative 2%-3% comps and flat operating cash flow. However, it sees another five to seven years of domestic organic growth until worries over store saturation become serious. Compared with Home Depot, Lowe's has a much smaller store base and a way to go before it matches its larger archrival. Lowe's plans to establish about 140 new stores throughout 2008, has 400 approved locations, and sees at least 500 other potential locations in the U.S.

Management has targeted the do-it-for-me (DIFM) market as a key growth driver in the next four to five years. The company sees this as a "vibrant market" going forward; it knows it is time to build a deeper relationship with its customers and improve its position as the destination for home improvement products. Home Depot's recent trials in the DIFM space speak to the need to tread carefully, but Lowe's sees solid growth opportunities to build up that segment of the business.

The final targeted growth avenue is international, and Lowe's would like to have non-domestic expansion in full swing within the next six to eight years. The first location is planned for Toronto, with another 22 Canadian stores in the pipeline, and three to five stores in Monterey, Mexico, are targeted for a 2009 opening.

The Foolish bottom line
Lowe's expects continued domestic growth and a steady migration to DIFM and international avenues to help sales grow 8%-11% between 2008-2010. It is also projecting low-single-digit comps and 12%-15% growth in earnings over this time frame as operating cash flow improves around 15 basis points annually.

In the nearer term, it plans to take share from more-embattled peers as they struggle with the housing downturn. It fully expects population growth and demand for vacation homes to be key drivers for expanding its approximately $700 billion addressable home improvement market.

So with just under $50 billion in total sales expected for the coming year, there is still plenty of room for Lowe's to expand its home improvement empire.                           

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10/21/2016 4:02 PM
LOW $70.65 Up +0.76 +1.09%
Lowe's CAPS Rating: ****
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HD $126.60 Up +0.35 +0.28%
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