This year has been a wild one for lumber prices. Measured per 1,000 board feet, the lumber price soared close to $1,700 by May before crashing down to just under $500 as of this writing.
It's the magnitude and speed of this price movement that's causing difficulty for Lowe's (LOW -0.30%) management. The violent fluctuations make it challenging for the company because of price changes between the time Lowe's buys from suppliers to the time it hits the shelves.
Let's look at the various ways crashing lumber prices are affecting Lowe's and what it could mean for investors.
Soaring lumber prices turned customers away
As one might imagine, when lumber prices soared to record highs earlier in the year, it discouraged some would-be customers from starting projects that included the commodity. The decision affected sales of lumber and of products associated with lumber, like nails, tools, stains, etc. In its most recent earnings conference call, Lowe's management noted some customers were unwilling to invest in home-improvement projects because of the elevated lumber prices.
Those who could not delay projects, because they were either necessary or urgent, ended up paying the higher prices. In its fiscal second quarter, lumber price inflation helped increase comparable average sales per visit by 400 basis points from the same time last year. Overall, the comparable average ticket increased by 11.3%, so the rise in lumber prices accounted for more than one-third of the average ticket increase.
That being said, the rapidly changing prices for lumber ended up lowering the gross profit margin by 25 basis points. What's more, the negative effect likely continued through August for Lowe's. Those figures will show up in the company's fiscal third-quarter results, which start from July 30 onward. Here is what David Denton, Lowe's executive vice president, said on the matter:
Now, I'd like to spend just a moment discussing the near-term impact from the steep drop in lumber prices beginning in early July. Since that time, we have been selling many of our lumber products at compressed margins because we had previously purchased these products at higher cost. However, we expect that by the end of August, we will have substantially sold through these higher cost inventory layers.
The good news for Lowe's is that old-fashioned economic relationships are holding. As the price of lumber is falling, consumers are buying more of it. In a sneak peek of the current trends in its fiscal third quarter, management noted several hundred-basis-point improvements in comparable transaction count from the previous quarter driven by crashing lumber prices. That means, an increasing number of people are purchasing at Lowe's or people are visiting more often, or a combination of both.
So while lumber price movements were negative in the previous quarter, they will positively affect the current quarter, if prices stabilize. If the violent price changes persist, difficulties will remain for Lowe's in managing the commodity. With the pandemic still raging, the odds are against price stability. For now, management has handled the situation skillfully, only losing 25 basis points of gross profit margin. Investors should keep an eye on the situation, but there is no reason to panic or sell the stock.