Analysis: On heels of ‘excellent’ first quarter, Lowe’s in a good position
An excellent performance from Lowe’s saw sales increase by 10.9% on a total basis and by 11.2% in comparable terms. Within the U.S., comparable sales rose by 12.3%. Best of all, despite increases in costs, Lowe’s managed to lift both operating profits and net income – with the latter up by 27.8% over the prior year. Admittedly, some of this is because of the ongoing operating improvements Lowe’s has made which lift last year’s weaker performance, but it is nevertheless an impressive outcome.
Lowe’s will also be pleased that it managed to beat its larger rival, Home Depot, in terms of growth – and did so by quite a large margin. Some of this is attributable to the enhancements made to the customer proposition and attracting more professional customers, but a lot of it is down to pandemic induced buying as consumers undertook more projects in their gardens and homes. Lowe’s gained more here because it has a much smaller existing customer base, which helps to amplify the impact of the additional custom. Moreover, Lowe’s is less exposed to bigger ticket areas like kitchen and bathroom refurbishment, which have performed badly over the lockdown period and offset some of the sales gains made elsewhere at Home Depot.
Enhancements to the Lowe’s website and apps, which have been an ongoing focus of Marvin Ellison’s improvement program, paid dividends as online sales rose by 80%. This includes many new customers shopping online with Lowe’s for the first time. Lowe’s deserves credit for coping with the sharp increase in volume and for quickly rolling out services like curbside collection at its stores.
Towards the latter end of the quarter, consumers’ focus has shifted towards their gardens and our data show a sharp uplift in the number of people undertaking gardening projects and/or buying new outdoor furniture and accessories. In our view, this is helpful for Lowe’s as its garden center proposition is relatively strong. Outdoor living collections and furnishings have also been enhanced and ranges are more compelling and prominent in stores.
Looking ahead, the hope for Lowe’s is that some of the new custom it has gained will stick around and help drive growth. In our assessment this is a possibility, although we caution that many new shoppers are not avid home improvers and will only buy occasionally. As such, one of Lowe’s jobs will be to convert them to more regular shoppers which, arguably, means pivoting more heavily into seasonal and softer assortments – something we have long argued that Lowe’s should do to help differentiate itself from Home Depot.
At the same time, Lowe’s will need to maintain its pace with the professional community. Although this area of business has been a little choppy during the crisis, Lowe’s remains on a good trajectory and its enhanced service levels and better availability should continue to attract the professional community. This will be especially helpful as there will be an uptick in pro trade as the country reopens and tradespeople deal with the backlog of jobs not undertaken during lockdown.
Overall Lowe’s is in a good position. The improvements Marvin Ellison and his team made before this crisis hit have ensured that operations remained smooth over the quarter. Without these measures we believe that Lowe’s would have struggled to cope both in terms of dealing with capacity increases and maintaining stock levels. This is a testament to the work done so far and it bodes well for the future.