Lowe’s Positioned for Market Share Gains, Adding Upside to Stock Value

Lowe’s (NYSE:LOW) is the world’s second largest retailer of home improvement products after Home Depot (NYSE:HD). Through its more than 1,700 stores spread across the US, Canada and Mexico, Lowe’s offers a wide range of home improvement products and installation services to individual home owners as well as professional builders.

We estimate that Lowe’s plumbing, electrical, & kitchen product segment (which is part of the broader home improvement products category) is the single largest driver of the company’s stock value, generating close to 33% of our estimated $25.87 stock value for Lowe’s. Our price estimate is roughly 5% ahead of market price. Still, the potential for sustained market share gains in the plumbing, electrical & kitchen segment could trigger further upside to our number.

North American Plumbing, Electrical & Kitchen Market Size

The size of the North American plumbing, electrical & kitchen market decreased from an estimated $110 billion in 2007 to $90 billion in 2009, largely due to a slump in the housing market and concurrent fall in consumer spending during the economic downturn.

We estimate that the North American plumbing, electrical & kitchen market will increase from about $90 billion in 2009 to $125 billion by the end of our forecast period, as maintenance and repair projects will likely drive near-term growth, to be followed by more long-term growth from a housing market rebound.

Lowe’s Plumbing, Electrical & Kitchen Market Share

Lowe’s market share in plumbing, electrical & kitchen products has grown from an estimated 13% in 2005 to 17% in 2009. The focus on customer service and attractive pricing enabled Lowe’s to lift its market share during the prevailing economic recession.

We expect Lowe’s to continue market share gains in this product segment, albeit at a slower pace than historical rates. We project that the company will reach 19% market share by the end of our forecast period.

As of Q3 2010, Lowe’s operated 1,734 stores in the United States, Canada and Mexico as compared, vs. Home Depot’s total of 2,244 stores, which includes 1,976 Home Depot stores in the US. ^{[1] [2]}

Lowe’s expects to open approximately 17 stores during Q4 2010, bringing its total new store openings for 2010 to 42 stores. Comparatively, Home Depot is targeting a total of 6 new store openings for the year. As Lowe’s gradually narrows the store count gap with Home Depot and capitalizes on growing do-it-yourself activity, its market share should improve.

Stock Upside from Sustained Market Share Gains

Despite Home Depot’s position as market leader for home improvement shopping, a June 2009 report from BIGresearch illustrated that Lowe’s has been able to close the gap over the past few years. In the past five years, Home Depot lost more than half of its lead over Lowe’s in consumer preference surveys. In 2005, Home Depot was the preferred retailer for nearly 32% of home improvement shoppers. However, this number fell below 29% in 2009. Comparatively, the percentage of consumers citing a preference for Lowe’s grew from below 22% to beyond 24% during the same time period. ^[3]

If these trends continue, and Lowe’s can correspondingly continue its pace of market share gains, there could be further upside to our price estimate. To illustrate this point, we estimate that, should Lowe’s increase its plumbing, electrical & kitchen market share to 22% by the end of our forecast period (vs. our 19% estimate), it could generate 6% upside to our $25.87 price estimate.

1. Lowe’s Reports 3Q 2010 Results [↩]
2. Home Depot Reports 3Q 2010 Results [↩]
3. BIGresearch’s June Retail Ratings [↩]