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Lowe’s Tells Investors About Its Online Challenges

By Demitri Kalogeropoulos – Nov 30, 2019 at 11:10AM

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The home improvement retailer's sales grew in the third quarter despite struggles in Canada and in its e-commerce channel.

Lowe's (LOW 0.94%) recently issued third-quarter earnings report gave investors lots of new information to digest. Sales and profitability appear to be holding up well, even if these figures still trail those of chief rival Home Depot (HD 0.90%).

Meanwhile, Lowe's is getting bolder in its plans to transform itself by shutting underperforming stores, especially in the struggling Canadian market. CEO Marvin Ellison and his team detailed their thinking around these fundamental issues in a conference call with investors this past week, and below we'll take a closer look at some highlights from that presentation.

Contractors install new flooring.

Image source: Getty Images.

Expanding through big challenges

"I am very pleased that we can deliver 3% U.S. comp in the third quarter with virtually no benefit from Lowe'" – Ellison

Lowe's baseline growth rate held steady at 3% in Q3, about where it has been all year. Home Depot, meanwhile, notched its second straight acceleration as its comps growth improved to 3.8%.

Still, Lowe's executives said they were happy with the results since that growth overcame three significant headwinds: lumber price deflation, comps declines in Canada, and low-single-digit percentage growth in its e-commerce channel. Management was especially pleased with its gains in the professional contractor niche, which might have come at the expense of Home Depot.

Energizing the e-commerce business

"Our first step in improving our online business is creating stability." – Ellison

Sales in Lowe's e-commerce channel only grew 3%, which stands in stark contrast with Home Depot's 22% digital sales spike. Lowe's attributed the sluggish result to a few major shortcomings in its digital platform. These include supply bottlenecks, pricing challenges, and an overburdened shopping experience.

Management says they're in the process of completely renovating the digital platform and moving it to a new cloud service that will help fix these problems. That shift should make Lowe's more competitive against Home Depot and other consumer-discretionary retailing rivals, but executives aren't expecting the change to start materially lifting results until the second half of 2020.

Improving Canada results

"Turning to Canada, in the third quarter, we posted negative comp sales, below our expectations, which exerted significant pressure on our total company comp." – Ellison

The sales decline in Canada caught management by surprise. Executives took it as a sign that a more aggressive response is required than the restructuring they announced almost a year ago. To that end, Lowe's announced the quick closure of a further 34 underperforming stores, and plans for a major cost-cutting process that will consolidate some of the five retail brands that it operates in the country.

Looking ahead

"The underlying macroeconomic fundamentals in the U.S. remain supportive as the solid pace of job growth, accelerating wage increases and home price appreciation continue to be tailwinds for our industry." – CFO David Denton

Lowe's affirmed its 2019 sales growth outlook, which still stands at 3%. That was good news for shareholders, especially considering that Home Depot reduced its outlook slightly in its most recent earnings report. However, the industry leader still expects to grow more quickly than Lowe's, predicting comps growth of roughly 3.5% on top of last year's 5% increase.

Demitrios Kalogeropoulos owns shares of Home Depot. The Motley Fool recommends Home Depot and Lowe's and recommends the following options: long January 2021 $120 calls on Home Depot and short February 2020 $205 calls on Home Depot. The Motley Fool has a disclosure policy.

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