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What Lowe's Executives Want Investors to Know

By Demitri Kalogeropoulos – Aug 23, 2019 at 1:00PM

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The management team breaks down a second straight quarter of accelerating growth.

Lowe's (LOW 0.01%) is still playing catch-up with the industry's leading retailer, but that gap is closing. The home improvement giant, which has for years trailed Home Depot (HD 0.67%) on key metrics like sales growth, market share, and profitability, made strides in all these areas during the second quarter. Those successes allowed Lowe's to affirm its growth goals for the year just a day after its chief rival reduced its targets.

In a conference call with Wall Street analysts, new CEO Marvin Ellison, who used to work as an executive at Home Depot, detailed the factors supporting the retailer's strong momentum. Let's look at highlights from that presentation.

A contractor installs a new window.

Image source: Getty Images.

Getting better at selling stuff

During the quarter, we leveraged our successful Memorial Day, Father's Day, and July 4 events, taking advantage of the seasonal project demand. And we also drove traffic with our compelling values, relevant assortments, and our continued shift into digital marketing channels.
-- Executive vice president William Boltz

Lowe's reported the same weather-fueled growth pattern that Home Depot noticed in the quarter, with sales gains sluggish in May before accelerating quickly over the next two months. Executives credited their "excellent coordination" among stores, the supply chain, and marketing departments for creating demand around key holidays and fulfilling it with quality shopping experiences.

More broadly, Ellison said Lowe's made progress at executing in the retail fundamentals that have kept it underperforming in recent years. As an example, he noted that the paint department led its wider category for the first time in a decade. These wins helped comparable-store sales edge past Home Depot's result for the second consecutive quarter.

Targeting pro customers

Our commitment to improving in-stocks and customer service along with intensifying our commitment to the pro customer were integral to our stronger event execution and comp growth in the second quarter.
-- Executive vice president Joe McFarland

With its core shopping categories on the mend, Lowe's had the power to more aggressively target the jewel of the home improvement industry today, the professional contractor. This customer segment is growing more quickly than the wider industry and has other attractive advantages, including higher average spending and elevated margins.

That's why management saw it as good news that it outperformed with pro shoppers in key areas like paint, tools, and millwork. The retailer plans to push this advantage in future quarters but will have to fight Home Depot over this coveted piece of market share.

It's still the early going

We expect a total sales increase of approximately 2% for the year driven by comp sales increase of approximately 3%. We expect an adjusted operating margin increase of 20 basis points to 50 basis points.
-- CFO David Denton

Like Home Depot did a day earlier, Lowe's said that its modest outlook for the second half of the year didn't suggest any weakening of the housing industry or home improvement trends. In fact, executives said they see a "solid underlying outlook for the remainder of 2019" that's supported by consumer confidence, rising wages, and an aging housing base in need of repair and upgrading.

That said, management found it prudent to simply affirm its outlook following the surprisingly strong second quarter, because of challenges like tariffs and its earlier stumble in Q1. The chain still expects to grow sales by about 3% in 2019 while adjusted profit margin inches closer to 10%.

Hitting those figures would merely close the operating gap slightly with Home Depot, but would be only the start of a bigger rebound, if you believe the management team. "As we've said many times," Denton explained, "we are in the early days of our transformation."

Demitrios Kalogeropoulos owns shares of Home Depot. The Motley Fool has the following options: long January 2021 $120 calls on Home Depot. The Motley Fool recommends Home Depot and Lowe's. The Motley Fool has a disclosure policy.

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Lowe's Companies, Inc. Stock Quote
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