VALUATION HIGHLIGHTS

1. Lowe's constitute 100% of the Trefis price estimate for Lowe's's stock.

WHAT HAS CHANGED?

1. Lowe's Tops Q3 Estimates

Lowe's reported quarterly sales of $20.2 billion and earnings per share of $2.89 per share, exceeding estimates but declining from prior-year levels of $20.5 billion and $3.06 per share. Rising interest rates and economic unpredictability have led to consumer caution, resulting in a 1.1% decline in comparable sales for the third quarter. The persistent decline in demand for larger discretionary do-it-yourself (DIY) projects was somewhat alleviated by increased sales driven by storm-related activity and strong showings in the professional and online channels. It should be noted that the company's operating margin fell 60 basis points y-o-y to 12.5%, due to increased supply chain investments to facilitate its online orders.

Note: Lowe's FY'23 ended on February 2, 2024. Q3 FY'24 refers to the quarter that ended on November 1, 2024.

2. Full Year 2024 Guidance

Looking ahead to the full year 2024, the home improvement retailer anticipates total sales to fall between $83 billion and $83.5 billion, with comparable sales expected to decline between -3.0% and -3.5%, from previous forecasts of between -3.5% and -4.0%. Operating profit margins are expected to range between 12.3% and 12.4%. It also expects adjusted diluted earnings per share of approximately $11.80 to $11.90 (previously $11.70 to $11.90).

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Lowe's EBITDA Margin: From 2019-2021, Lowe's improved margins from 11.6% to 15.3% by streamlining its operations, supply chain, and cutting down heavily on its SG&A expenses. However, this value was down to 13.3% in 2022, due to the rampant inflation before again growing to 16.3% in 2023. Productivity initiatives and lower transportation costs drove the margin increase for the year.

Going forward, we expect the margins to fall in 2024 but then improve through our forecast period, aided by same-store growth and with further operating leverage as comps improve. However, if the comps grow slower than expected, it can cause a 10% downside to our current price estimate, with margins reaching just under 15%. On the other hand, if the housing market and home improvement industry continue to strengthen, and outpace previously forecast growth estimates, and comps improve better than expected, resulting in the margins reaching 20%, there could be an over 5% upside to our current price estimate.

BUSINESS SUMMARY

Lowe's is the world's second-largest retailer of home improvement products, after Home Depot. Through its 1,746 stores spread across the U.S.(having exited from Mexico and Canada), Lowe's offers a wide range of home improvement products and installation services to individual homeowners as well as professional builders. In addition to the physical stores, consumers can buy these products through the company's dedicated website.

Lowe's has deep penetration levels in the U.S. with a total of 1,746 stores at the end of FY 2023. Lowe's main selling point is that it outshines its main competitor Home Depot in terms of the in-store shopping experience for consumers. This has forced Home Depot to upgrade its store environment and provide better customer service. Also, Lowe's is more focused on the do-it-yourself niches while its main rival performs better with professional contractors.

KEY TRENDS

Pro customer activity will drive home improvement industry growth in the near future

Professional customers place larger orders compared to the do-it-yourself segment, and better serving these customers can boost revenues for Lowe's in the long term. While the recovery in the housing segment has benefited players such as Home Depot and Lowe's, the latter's growth has not been as stellar, primarily due to its focus on the do-it-yourself consumer segment. While the do-it-yourself segment is lucrative and accounts for the bulk of Lowe's revenues, these customers are small ticket buyers and many are just one-time customers. On the other hand, pro-customers account for only 30% of Lowe's revenues, but they enter into big-ticket transactions and are usually repeat customers. Keeping this in mind, the company has been focused on these customers by introducing pro-focused brands such as Mapei and Zoeller.

Shift in consumer preferences will impact the traditional range of home improvement products

A survey from NRHA suggests a change in the buying patterns among U.S. home improvement consumers. People are no longer loyal to only products made in the U.S. Consumer demand is driven more by price and quality. Consumers may find foreign products that are better suited to their needs more appealing than products made in the domestic market. Another observable trend is the shift in consumers toward buying green or eco-friendly products such as water-saving flushes and electricity-saving appliances.

Dependent on Macroeconomic Conditions

Lowe's is heavily reliant on the improvement of the housing industry. The housing market has seen a resurgence of late. People who buy new homes spend money on improving their homes, installing appliances, buying furnishings, etc. It is not just the new homes; the remodeling of existing houses is also on the upswing.

Lowe's share price and performance, in general, have continued to benefit from the phenomenal growth in housing markets in the previous years, and steady growth in recent times.