When Lowe's Companies, Inc. (LOW 1.07%) announced its second-quarter earnings last month, the big news was the naming of Marvin Ellison as its new CEO, who clearly faces some challenges ahead. Lost amid the change at the top, however, is that despite the company's somewhat disappointing quarterly results and the fact that it still has some catching up to do with respect to its archrival Home Depot Inc (HD 0.13%), the company remains in a decent position overall.
In the second quarter, the company's revenue rose to $17.4 billion, a paltry 3% increase year over year, and earnings per share (EPS) grew to $1.19, a 16% increase year over year. Comparable sales increased just 0.6%, which was driven by a decrease in customer transactions and a 4.3% increase in the average ticket.
| Lowe's Metrics | 2018 Q1 | 2017 Q1 |
Year-Over-Year Change |
|---|---|---|---|
| Net sales | $17.4 billion | $16.9 billion | 3% |
| Adjusted EPS | $1.19 | $1.03 | 16% |
| Quarterly dividend/share | $0.41 | $0.35 | 17% |
Source: Lowe's.
After carefully going through the company's conference call, however, I don't believe the situation is as dire as the numbers make it sound. Rather, I believe sales were driven down by temporary factors while the company's long-term diagnosis remains healthy.
A temporary cold spell
One of the primary reasons sales were so stagnant was that most of the geographic regions Lowe's serves suffered such an unusually cold start to spring. Earlier in the quarter, Home Depot reported disappointing numbers for the exact same reason. As outgoing CEO Robert Niblock put it, "With more rain and snow in the first quarter than we've seen in 12 years and the coldest April since 2007, outdoor products were certainly impacted." For Lowe's this makes a significant difference, as 35% of Q1 sales are historically driven by outdoor categories but, when there's six inches of snow outside, most homeowners aren't thinking about buying a new grill or planting gardens.
Niblock reiterated, however, that indoor categories all enjoyed positive comps, driven by double-digit percentage gains in appliances and sales to Pro customers, an especially important customer demographic to capture for home improvement retailers, were especially strong in lumber, building materials, tools, and hardware. With sales strong in categories not impacted by the unusual cold, I don't think shareholders with a long-term mindset have too much to worry about. In fact, given some of the initiatives management is undertaking, there appear to be several reasons to be downright optimistic.
Springing into action
For years, Lowe's has trailed Home Depot in a variety of different ways, one of which was leveraging technology to run more efficient operations, something that finally seems to be changing. One of the things management stated it is focused on is the optimization of the company's supply chain to improve customer satisfaction and inventory management. For instance, Chief Customer Officer Michael McDermott stated:
For example, we're currently testing ways to improve the flow of product from our regional distribution centers to our stores, including more frequent highly organized shipments of product to allow for greater efficiency in unloading trucks and stocking product on shelves. And given increased demand for in home delivery, we're piloting a segmenting delivery network for appliances and other bulky product through a network of bulk distribution centers and cross-dock facilities.
Lowe's also reported progress in stabilizing its gross margins by using analytics tools to ensure it was competitively pricing "highly elastic traffic-driving products" while increasing profitability on "less elastic" products.
Finally, Lowe's is also optimizing the use of its staff in key areas to improve customer interaction and satisfaction. One example McDermott gave in this area was cross-training almost 17,000 sales associates so that they would know how to mix paint. This can free up expert paint associates to consult with customers on project advice and color selection.
Where Lowe's is headed
While there is plenty of work to be done, Lowe's remains a company in a decent position, with low-hanging fruit it can harvest to improve margins and drive profitable growth. Meanwhile, there remains plenty to like about shares in the company. The company currently trades at a P/E ratio of about 21 and has history paying a rising dividend. There is reason to believe Lowe's can be an investment that beats the market over the next few years.
That being said, I still believe Home Depot remains a better investment. Home Depot just seems to be further ahead in a technological arms race, and that could prove difficult for Lowe's to fully close the gap. While I believe Ellison will be a solid leader for the company, I would rather wait to see that thesis begin to play out before betting on this horse changing its rider midstream. Besides, the market already priced some improvement into the stock price when it spiked 12% on the announcement of Ellison's hiring. While I believe Lowe's is a solid investment, every time I think about investing in some of its shares, I can't come up with a compelling enough reason not to invest in Home Depot instead.
