Buyback Doesn’t Make up for Puny Sales

August 22nd, 2011 by Trefis Team
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LOW: Lowe's Companies logo
LOW
Lowe's Companies

Lowe’s (NYSE:LOW) announced a $5 billion buyback over the next three years in a bid to shore up investor confidence following its poor earnings announcement a few weeks. The company lowered its sales outlook citing continued weakness in consumer spending and lingering macro headwinds while competitors like Home Depot (NYSE:HD) and even Wal-Mart (NYSE:WMT) faced the same issues but were able to raise their earning guidance for the full year. Never mind the question of how Lowe’s will pay for this purported buyback with $850 million in cash on the balance sheet and struggling cash flow. This indicates the company either plans to generate substantial enough cash flow in the coming years to fund this buyback and cover investments needed to run the business or it plans to take out more debit (or a combination of both).

We have a revised $23 Trefis price estimate for Lowe’s Companies, which is about 15% ahead of the current market price and so we do seem some upside to the shares on fundamental factors. However in the near term we hope to see some more encouraging signs for sales growth.

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Macroeconomic environment poses challenges

Americans have continued to cutback on spending amid the painfully slow recovery. To add, the dramatically changed macroeconomic environment and equity markets volatility have further dragged down the already weak consumer sentiment. Given this, Lowe’s has lowered its sales outlook for 2011. After Q1, Lowe’s had projected revenue guidance of 4% for 2011. However, Q2 sales declined 1.5% (y/y) and Lowe’s has now revised its revenue guidance to 2% as the consumer sentiment especially as sentiment in the home builder and home improvement segments dipped further (Home builder sentiment stuck at a low level in August).
Focus on competitive pricing for most visible items and cost-cuts

Lowe’s expects consumers to focus on smaller-ticket repair and maintenance projects – costing less than $500. To stimulate sales by attracting more customers, it is offering competitive pricing on the most visible and high velocity items that are easiest to compare to other retailers. To attract the customers who wait for the sale season, Lowe’s has come up with “Every Day Low Price” program offering 5% daily discount to its cardholders. It also recently completed the roll-out of its repair services. These efforts are expected to bring sales up by next year.

The company also expects to launch MyLowes.com this year to boost its online sales channel. We wrote about in a recent article titled Lowe’s Wants to Light up Sales Online. It’s larger rival Home Depot  also is pushing further online in an effort to expand this sales channel. Home Depot Takes Home Improvement Shopping Online. Lowe’s is also rationalizing its cost-efficiency and recently closed seven of its under-performing stores.

See our complete analysis of Lowe’s here.