Rising interest rates and economic unpredictability have led to consumer caution. The persistent decline in demand for larger discretionary DIY projects in Q4 was somewhat alleviated by increased sales driven by rebuilding efforts following hurricanes Milton and Helene, and strong showings in the professional and online channels. It should be noted that the sales from DIY customers account for roughly 70% of Lowe’s sales.
Note: Lowe's FY'24 ended on January 31, 2025.
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. However, the retailer's margins were down to 14.8% in 2024. Slower housing turnover and higher borrowing costs have kept some customers on the sidelines.
Going forward, we expect the margins to improve in 2025 aided by same-store growth and with further operating leverage as comps improve. With the tougher housing market in the backdrop, Lowe’s has tried to move the needle by investing in its online business, attracting more sales from contractors, electricians, and other pros, and expanding value-driven offers for homeowners.
Lowe's is the world's second-largest retailer of home improvement products, after Home Depot. Through its 1,700 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. 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 sales are divided equally into pro sales and DIYs.
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. Lowe's growth has not been as stellar in the segment, 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.
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.
Lowe's is heavily reliant on the improvement of the housing industry. 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 has navigated a challenging landscape in recent years, as the housing market has slowed due to rising interest rates. The Federal Reserve's aggressive rate hikes (until September 2024 when it announced its three consecutive rate cuts) since 2022 aimed to combat inflation, resulted in higher mortgage rates that suppressed home sales. The disparity between current borrowing costs and the lower rates existing homeowners enjoy has created a "lock-in effect," where homeowners are reluctant to sell and purchase new properties. This reduced market activity has impacted Lowe's. Despite these challenges, homeowners will likely continue to invest in maintaining their properties, providing a potential source of stability for Lowe's.
That said, Lowe's share price and performance, in general, have been linked to growth in housing markets in the previous years.
