Lowe’s Had a Disappointing Quarter, but It’s Not What It Seems

In some businesses, if you lose days due to weather, you can't make them up. A ski slope, for example, can't make up days in winter that it loses to unseasonable warmth. Lowe's (LOW -0.04%) and the home improvement/construction business in general don't have that problem. Sales may shift due to weather, but eventually projects get done, houses get built, and gardens get planted.

On this episode of Industry Focus: Consumer Goods, host Vincent Shen is joined by Motley Fool contributor Dan Kline to talk about the company's latest results, which were hurt by a cold start to the spring season in the Northeast. They also look at the six areas the company is working on to improve its business.

A full transcript follows the video.

This video was recorded on May 29, 2018.

Vincent Shen: The company reported their fiscal 2018 first quarter yesterday, very recently. I was going through the transcript, looking at the press release, some of the headline numbers there. Comps were up only about 0.6%. Revenue growth, a little bit better than that. But they're still not where management wants to be.

Dan Kline: It's a little bit deceiving. A few weeks ago, they actually put out a comment, a warning, saying that seasonality -- it was cold in the Northeast longer. A big part of their business in the spring season is gardening. They actually had a huge drop in sales under $50, and that's people who come in and they're buying a small amount of stuff for their home garden, but it's a huge volume of customers. We talked about seasonality. In some businesses, if the season doesn't start on time -- in the ski business. If it doesn't snow, you can't make up days in December in July. In the gardening business, someone is not going to say: "Well, now I'm not having a garden. It started two weeks late." So they will catch up these sales. They're actually predicting that they will make them up in the next quarter, and say that so far, they're already trending well ahead.

Shen: Seasonality comes up a lot in our discussions of other companies in different sectors, especially for retailers, but this is a business where I actually take any "excuses" that they make around seasonality pretty seriously, just because, obviously, the summer months are by far their busiest, and the winter months are their weakest.

Kline: And if you look through the history of the company, sales shift around based on when the winter ends. As simple as, let's say you're putting a fence in at your house. You cannot put a fence in when the ground is frozen. So, you're not going to go buy fence posts and all that, but you're still going to put the fence in. So, this is a case where, yes, comp sales were a little bit weak, overall sales were up about 3%, which is based on higher tickets, traffic was actually a little bit down. But that should all even out over the course of a year.

Shen: Sure. Something else that they updated with the latest earnings, full-year 2018 guidance, just so listeners have an idea of what the company envisions for the remainder of the year, they see revenue up 5%, comparable sales up 3.5%, and operating margin down 40 basis points. We'll get to the profitability operating margin part in a second. But I look at those two numbers and I think to myself, that's pretty darn good for a brick-and-mortar retailer. That's quite enviable. I think a lot of brick-and-mortar businesses would look at that and be quite pleased if they were able to deliver numbers like that.

Kline: Yeah, especially because it's a brick-and-mortar retailer that -- I mean, Home Depot and Lowe's obviously both have websites, but they're not great. Lowe's is putting in an effort to improve that. One of the functions is building up their back channel so they can handle some of the different capabilities of ordering and in stock and that type of stuff. But for a chain that's doing 95% of its sales in the store, a 3.5% increase is incredible.

Shen: Yes. This is a good time for us to transition to what you mentioned in terms of the investments and initiatives that they're pushing with more sales associates on the floor, better customer service, more infrastructure for their online business because of the growth they're seeing there. I want to touch on six areas that management mentioned, I believe, during their fourth-quarter call, so, earlier this year. These are areas that they believe are really important to their long-term growth.

First, they want to get to know customers better, including their plans and needs. They want to increase the use of data collection and analytics. Home Depot is already really strong with that, and I think they're realizing, this is something we need to be better in. Second, they want to invest more in the technology to greater personalize their marketing and to also improve their service in the store. We touched on that a little bit. Third, they want to also invest in the infrastructure for online delivery and in-store pickup, and they're also opening a new fulfillment center and pushing a few other initiatives around that. Fourth, they want to try to stand out from the competition with some strategic brand partnerships with big names like Craftsman to bring customers in the door. Fifth, they want to better serve their professional customers and then develop their store employees to have more of the skills to serve this customer base, maybe become professional contractors themselves. That's obviously a big part of their focus, given how important that specific segment of customers is. Then, the last thing, they want to grow the do-it-for-me segment with things like services, so installations, in-home sales, and project specialists.

I think, with those six initiatives that management has specifically called out, there are some really important themes. Some of this came up earlier in our discussion in terms of the backdrop of the sector, some of the competitive dynamics. For example, omnichannel is always a big thing that comes up when you talk about a business like this.

Kline: It's a significant challenge, though. If you look at J.C. Penney or Target, they're not shipping two-by-fours or ladders. So in some ways, you have to build a different kind of system. If you order from Lowe's as a contractor, you can get a delivery. And it's a truck, it's a dedicated Lowe's truck.

Shen: Job-site delivery, yeah.

Kline: Yeah. So, you have to figure out how to have the right quantities of stuff and how to incentivize that either they pick it up or that they deliver it, and to make these things efficient. You can't just use the post office or FedEx the way other companies can.

The other thing is, on the customer service side, they talked a lot about centralizing some of the non-customer-facing pieces of this. I went to Lowe's to get a quote on redoing a bathroom at our other house. It took the guy two hours to put in all the stuff, and I was sitting there, and it was very uncomfortable. Now, the person meets with you, figures out what you want, and then a centralized quoting office does the quote. That allows the person in the store to see more people.

Shen: Not spend two hours right there, worrying about it.

Kline: Right. I get my quote 45 minutes later in an email, the same way I do from this guy, but he doesn't have to do all the specs while I'm sitting there, while he's not helping other people. So it's that kind of smart back-end functionality --

Shen: More efficient, yeah.

Kline: Yeah. And they've really, for the first time in the past year -- and I said this a little bit before -- put a focus on the customer. If people are walking out -- if I need a sink, and I walk out, and I didn't buy a sink, I'm either leaving Lowe's and going to Home Depot, or I'm going to a local hardware store, or I'm going online. So you have to capture that customer. And sometimes, that's just putting a body in front of them. It's not easy, in Home Depot or Lowe's, to get a person to pay attention to you sometimes. They're really putting a renewed focus on that.