Analysis: Despite soft Q1, outlook for Lowe's is still optimistic

Although overall sales at Lowe's increased by double digits, the somewhat softer comparable numbers and the decline in net income have taken a little of the shine off first quarter performance.



The same-store numbers are perfectly respectable but are notably weaker than the figures Home Depot put out earlier in the month. In our view, Home Depot still has the edge when it comes to brand visibility with customers undertaking bigger hard-improvement projects -- something that has served it well over the past few months. To be fair, Lowe's is not completely deficient in these areas, but it does play second-fiddle to its bigger rival.



It is also important to note that, this quarter, Lowe's was up against some tough comparatives from the prior year. This most certainly softened same-store sales growth, although some less challenging comparatives in the quarters ahead bode well for the future growth trajectory. It is also only fair to say that against the wider context of the retail market, Lowe's figures are solid.



The one area of continued strong performance is on the softer side, especially indoor decorative projects. Here we are encouraged by the progress Lowe's has made in store, including the increased use of specialist advisors.



We also believe that smaller initiatives, such as the rebranding of the home furnishings subsidiary ATGStores.com to The Mine, give Lowe's good forward potential in the softer side of the home market.



A focus on decorative does not mean the hardcore home improver or professional segment are not targets. They are, and we believe that Lowe’s continues to see uplifts from its Lowe’s for Pros program, which is focused on providing better ranges and offers in categories like lumber, as well as added value services like meeting customers at their workplace or on-site. The transactional professional website continues to make progress. However, Lowes's does need to work harder to become a destination for the semi-professional serious home improver.



While disappointing, the deterioration in profit does not reflect any serious operational challenges. Rather it is the result of a $464 million loss on the extinguishment of debt. Without this, profit would have been down by a far more reasonable 2.2% on a pre-tax basis.



Despite the softer start, the outlook for the rest of the fiscal year is optimistic. Some weaker comparatives will inflate numbers, but in addition to this, we see various initiatives -- especially around home decor -- paying dividends.