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Is Lowe's a Buy?

By Matthew Cochrane - Apr 13, 2019 at 10:48AM

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Will Lowe's new management team's plan to turn around the home improvement retailer's fortunes work?

Judging by its stock price, you would never know Lowe's Companies, Inc (LOW 2.10%) was struggling. Over the trailing one-, three-, and five-year periods, the nation's second-largest home improvement retailer is comfortably beating the S&P 500 index. Listen to new CEO Marvin Ellison tell the story, though, and you will quickly begin to appreciate the challenges ahead for the company.

Indeed, on his first day on the job, Ellison skipped the welcome reception at corporate headquarters to go down to the local Lowe's to work at the contractor's desk. Why? "To understand why we were not serving that customer segment better," he said while relaying the story at the Shoptalk 2019 conference. On Black Friday, the busiest shopping weekend of the year, the company's website suffered an outage.

Problems like this abound when discussing the current condition of Lowe's, adding up to very lackluster results in its latest quarter, when the company's top line grew only 1% over 2017's fourth quarter and comparable store sales increased a similarly tepid 1.7%. Let's take a closer look at some of these problems and Ellison's plans to turn the company around.

The front view of a Lowe's store location.

Lowe's management team hopes to improve the company's online sales by making its website easier to navigate and filling it with greater product selection. Image source: Lowe's Companies, Inc.

A fixer-upper

At the root of most of Lowe's problems are probably three distinct areas that need improvement. Let's examine each of these areas in turn:

Online sales. In Q4, online sales grew 11% year-over-year, even as rival Home Depot Inc (HD 1.87%) increased its own online sales by 24%, while coming off a much larger base. A lot of the blame is simply due to poor execution. In Lowe's fourth-quarter conference call, in addition to the above example of Lowe's site experiencing outage during peak holiday sales times, management also relayed problems regarding poor selection on the company's site.

To address this issue, Ellison made a number of key hires, including new chief information officer Seemantini Godbole, the executive who previously led Target's e-commerce operations, whom he expects to "lead an aggressive transformation of in 2019."

From the customer's perspective, according to Bill Boltz, Lowe's executive vice president of merchandising, this means making the site easier to navigate and filling it with better selections. From the employees' perspective, it means building out the site so that associates are "able to leverage as a solution for our customers inside of our stores." Boltz wants associates to think of the site as an endless aisle inside the store that they can point the customer to.

Inventory control. Another common tale concerned how poorly Lowe's was managing its inventory of key products, both online and in-store. This has especially affected the company's relationship with the all-important Pro customers, those who make their living in construction, maintenance, or a related field. At one point in the call, Ellison said the Pro customers had "literally stopped shopping us because we didn't have adequate inventory levels." 

Chief financial officer Dave Denton reported, "We experienced 55 basis points of pressure from substitute items that were offered over Black Friday weekend due to inventory shortages on advertised SKUs, as well as an accelerated clearance activity for holiday inventory in order to better position us for the spring selling season."

Ellison believes that rolling out lot-quantities for select products will ensure that Lowe's will be better able to meet the demands of Pro customers. The company is also planning to move slower-moving products out of stores and onto the company's site and setting up stores for specific seasonal products to help improve inventory control.

Omnichannel. Omnichannel is much more than just good e-commerce capabilities. It encompasses today's entire shopping experience, so customers can enjoy a seamless and integrated experience from the time they first browse for items on a company website to making a purchase at a store. Without first-class logistics infrastructure and delivery capabilities, however, this experience will be lacking.

Ellison said Lowe's is good at getting products to the stores, but not at making home deliveries, and in today's age, that's simply not good enough. He continued, "[I]n essence, what we're developing is a network of distribution centers and systems that will allow us to do store, job site and to the customer's home. And that's what we will start to build out this year."

The verdict

From the outside looking in, Ellison is making good personnel and strategic decisions. Whether they will ultimately work, however, remains to be seen. Investing in turnaround situations can be immensely profitable and lucrative, as many businesses undergoing transitions or going through hard times can be severely undervalued by the market. Unfortunately, that doesn't seem to be the case for Lowe's. Based on the midpoint of its full-year 2019 guidance, the company trades at a forward P/E ratio of 19, just slightly cheaper than Home Depot shares. At this time, it is probably best for investors to stay away from Lowe's and buy Home Depot, a company already firing on all cylinders, instead.

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Stocks Mentioned

Lowe's Companies, Inc. Stock Quote
Lowe's Companies, Inc.
$199.63 (2.10%) $4.10
The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
$308.46 (1.87%) $5.65

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