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Lowe's Talks About Its Building Momentum

By Demitri Kalogeropoulos – Updated Apr 10, 2019 at 11:19AM

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The home-improvement giant is betting big on the upcoming spring selling season.

Marvin Ellison hasn't had many opportunities to report good news to Lowe's (LOW -0.20%) investors since he took over the CEO spot last year. The former Home Depot (HD -0.16%) executive announced a reduced sales outlook in each of his first two quarters at the helm, in fact, while noting that execution problems were hurting the chain's sales and profit trends through most of 2018.

Lowe's latest quarterly results didn't do much to close the gap between the retailer and its chief industry rival. However, in a conference call with investors, Ellison and his team sounded a more optimistic tone about the traction they're seeing with their rebound plan.

A customer picks out lumber.

Image source: Getty Images.

Gaining momentum

We're very pleased with the [comparable-store sales] progression, which we believe further reinforces that our retail fundamental focus was in place and doing well in the quarter. -- Ellison

In referencing surprisingly weak sales growth in the prior two quarters, Ellison referred to failures by the chain to perform basic retailing competencies in areas like stocking, pricing, and customer service. Executives said their efforts here haven't completely removed these issues, but they've now been reduced to just "pockets of inconsistent execution."

Lowe's posted positive comparable-store sales across most of its geographies and product categories this past quarter, leading to a slight acceleration in overall gains. There were many signs of room for improvement, including in weak online sales and the fact that revenue gains are still trailing Home Depot's. Yet management believes they're turning a corner, as evidenced by a growth pace that rose during the quarter to culminate in a nearly 6% comp jump in January.

Check out the latest earnings call transcript for Lowe's.

Changes rolling through the system

We are transitioning into the season more efficiently, and we are setting our stores earlier, all of this to ensure that we have sufficient, seasonal inventory on hand and that we are positioned to capture the spring demand when the season breaks. -- Merchandising VP Bill Boltz

Lowe's transformation plan involves upgrades across its retailing system, including a revamped supply chain and online fulfillment infrastructure, better inventory management at stores, and improved customer service. While these adjustments will take place over many quarters, management has deliberately sped up some of them to prepare for the all-important spring selling season that should start across most of the U.S. in the next few weeks.

That means the current quarter will provide a key test of Lowe's wider rebound ambitions. Investors can weigh its successes and failures against those of rivals over the next few months to judge whether or not Ellison and his team are on the right track.

Looking ahead

The ... industry should continue to benefit from several factors, including income growth, lower federal tax rate, gains on household formation and continued home price appreciation. This growth is further supported by an aging housing stock. As home prices are increasing, consumers are staying in their homes longer and because of their improved financial position, they are investing in their homes. -- Ellison

Like Home Depot did earlier in the week, Lowe's ticked off several economic factors that are supporting continued industry growth despite a slowdown in homebuilding. The retailer is expecting to nab a smaller slice of those gains, with comps projected to land at 3% compared to Home Depot's 5% forecast. Operating margin should tick higher, Ellison said, but remain closer to 9% while Home Depot's profitability holds at nearly 15% of sales.

Lowe's management team would love to close those performance gaps, but first, the company has to demonstrate that it can definitively fix the nagging execution issues that have hampered sales both online and in its stores over the past year.

Demitrios Kalogeropoulos owns shares of Home Depot. The Motley Fool recommends Home Depot and Lowe's. The Motley Fool has a disclosure policy.

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