Lowe's (LOW 1.87%) stock is essentially flat year to date, while the S&P 500 has roared ahead with a 16% gain. The home improvement company has fared better over the past five years, logging a 47% gain, but it still trails the index gain of 86%. Lowe's does pay a dividend that yields 1.9% at the current share price, which adds a bit of a boost to its total returns, but they're still not close to those of the broad-market index.
Was this slow year a fluke or a sign of things to come? Here are some key areas to monitor if you are considering investing in Lowe's stock.
More professional builders are turning to Lowe's
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Lowe's has made a big push to attract professional builders and contractors to its locations. These buyers spend more money than regular customers and make regular visits to Lowe's and its peers since home building is their job.
In June, Lowe's acquired Artisan Design Group, and in October, it closed on its purchase of Foundation Building Materials -- two deals it inked to make itself a more appealing choice for builders.
NYSE: LOW
Key Data Points
The MyLowe's Pro Rewards program has been a big hit ever since it was relaunched earlier this year. It offers members-only deals and additional perks for professional builders. The MyLowe's Pro Rewards Credit Card also lets customers save up to 5% on everyday purchases for eligible products.
The company noted in its third-quarter earnings release that it sees enhancing its offerings for professional customers as a key to generating more sustainable sales and profit growth.
Slow revenue growth and high debt aren't a good combination
Although its professional sales are picking up, overall, Lowe's business has been stagnant. It only reported 0.4% year-over-year comparable sales growth in Q3, and total sales only increased by 3%. Meanwhile, its net income dipped by 5%.
Lowe's now projects that it will pay $1.4 billion in interest expenses for the entire year. That's higher than its previous $1.3 billion forecast and represents a large chunk of the company's profits. For instance, Lowe's reported $2.48 billion in Q3 operating income, and $352 million of that went to interest. Lowe's puts roughly 14% of its net operating income toward interest, and that amount could rise if Lowe's has to borrow more.
With a 1.04 current ratio, the retailer barely has enough current assets to cover its current liabilities. It's also sitting on $37.5 billion in long-term debt.
If Lowe's professional services business gains momentum, it could translate into long-term margin expansion, which would help it pay down its debt. The stock doesn't look good now, but investors have to remember that patience is required in long-term investing. Even top growth stocks have bad quarters and years, but if a company's fundamentals remain strong, its stock price will likely eventually catch up.
