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Lowe's Mitigates Impact Of Harsh U.S. Winter, Strong Spring Sales Expected

Feb 27 2014, 1:13pm CST | by

Home improvement retailer Lowe’s released its Q4 earnings results on February 26. Earnings for the quarter stood at $306 million, a gain of nearly 6.3%. Net earnings were propelled by top-line...

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34 weeks ago

Lowe's Mitigates Impact Of Harsh U.S. Winter, Strong Spring Sales Expected

Feb 27 2014, 1:13pm CST | by

Home improvement retailer Lowe’s released its Q4 earnings results on February 26. Earnings for the quarter stood at $306 million, a gain of nearly 6.3%. Net earnings were propelled by top-line growth as a result of the steady recovery in the U.S. housing market driving consumer appetite for home improvement products. The company’s net sales for the quarter stood at $11.66 billion, an increase of about 5.6% over Q4 2012.
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Lowe’s sales in spring are expected to be higher than usual as homeowners go about carrying out repair jobs due to the damage caused by the snow to driveways, roofs etc. The company expects comparable sales growth of approximately 4% and total sales growth of approximately 5% in 2014.

We have a $46 Trefis price estimate for Lowe’s stock, which will be revised shortly now that the earnings results are out.

See our complete analysis of Lowe’s here

Effect Of The Housing Market

The housing market recovery continued in October in the fourth quarter of 2013, spurred by strong consumer confidence and low mortgage rates but a slowdown occurred in November and December. New home sales rose were 463,000 in October, 445,000 in November and 414,000 in December. Sales of existing homes dipped compared to levels observed in Q2 and Q3. The reason that sales of new as well as existing homes are important for Home Depot is the spending on home improvement by new occupants.
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We had stated in our earnings preview note that the mixed nature of housing market data in the recent months is most likely an aberration due to unforeseen factors such as an unusually harsh winter season that slowed down business activity. Lowe’s management agreed that extreme weather conditions resulted in lower sales. The company said that it managed to respond quickly to weather conditions by fulfilling the demand for snow blowers, space heaters, heating fuels, snow shovels, ice melt and pipe fittings across the country. Even so, the harsh winter cost it about $100 million in sales. This translated to a loss of around 100 basis points as far the comparable sales growth rate is concerned. This figure could have been 4.9% instead of 3.9%. The gross margins, however, increased slightly as weather related sales contributed to higher margins.

Lowe’s’ management expressed the opinion that the housing market recovery will continue to benefit its sales in 2014. This is similar to what Home Depot said in its earnings conference call a day earlier. However, unlike Home Depot, Lowe’s didn’t offer detailed comments on how much it expects the housing market to grow or home prices to appreciate in 2014.

Quarterly Performance

Lowe’s net sales in Q4 2013 were around 5.6% higher year-over-year and reached $11.66 billion. The company’s comparable same-store sales (comps) increased by a healthy 3.9% over the previous year comparable quarter. This increase was driven by growth in the number of transactions as well as the ticket size of each transaction. Total transaction count increased by 4.4% and total average ticket increased 1.1% to $63.08. 
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Lowe’s also said that its ProServices business, which serves contractors and other professional customers, continued to perform very well. However, its relatively smaller share of this market in comparison to rival retailer Home Depot will ensure that the latter continues to outpace Lowe’s in terms of sales growth. Professional customers account for about 35% of Home Depot’s sales while the figure for Lowe’s is close to 25%. It is difficult for Lowe’s to catch up with Home Depot on this front because the latter has more stores in metropolitan areas where the professional customers are generally based.

Margins Remain Strong

Lowe’s gross margin was 34.67% for the quarter, up by 40 basis points from Q4 2013.

Lowe’s reported an improvement of approximately 40 basis points in gross margin due to value improvement. Margins also improved by due to a change in the product mix and lower inventory but this was essentially offset by markdowns necessary to clear seasonal product and the company’s proprietary credit value proposition.

In 2014, Lowe’s expects gross margins to continue improving. The company suffered an erosion in gross margins by 84 basis points in 2011 and 2012 and is seeking to regain 2010 levels. Beyond that it expects gross margins to remain flat.

We expect Lowe’s sales growth expectations to be revised upwards by 1-1.5% as 2014 progresses. If that does not occur, there will be a nearly 5% downside to our valuation.

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Source: Forbes Business

 
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