By Neil Saunders
Although Lowe’s total revenue fell during the quarter, this is mostly a function of the decision to close several underperforming stores. The comparable-sales numbers provide a better guide to the health of the business; when measured by this metric, Lowe’s continues to perform well and is delivering growth comfortably above the levels it was posting around a year ago.
Unlike last quarter, Lowe’s domestic same-store sales growth did not manage to beat that of its rival, Home Depot. Lowe’s continues to gain ground and pick up customers in some areas of the market, especially for decorative purchases, but most of the success has been driven by improving conversion and spend among existing shoppers.
Two strategies have improved traction with existing consumers:
- Better stock levels across all key categories have reduced defections and improved perceptions that Lowe’s can be relied upon to have what consumers want—something that is important to professional and amateur home improvers alike.
- Improved merchandising makes stores easier and more pleasant to shop, and gives store teams the ability to localize assortments according to demand.
Neither of these things is revolutionary, but they are essential housekeeping points that were neglected until Marvin Ellison and his team remedied them.
With the basics of the operation improved, Lowe’s has been able to focus on things which can transform the fortunes of the business. One of these is building the base of pro customers, which currently account for around 23% of group sales. This segment is lucrative, as they spend around 5.5 times more than an average DIY shopper. However, Lowe’s pro business has traditionally underperformed compared to Home Depot largely because of the weaker proposition. Steps such as having a permanently staffed pro-desk in store and having dedicated parking spaces for pros are starting to redress this imbalance. We believe that, over time, Lowe’s will start to gain ground and generate growth from its efforts with professionals.
Lowe’s must also apply the focused approach it is using to attract professional customers to its regular shoppers. As part of this, it needs to differentiate more strongly from Home Depot. The opportunity here is in retail occasions such as outdoor living or Christmas. Home Depot is reasonable in its execution of these opportunities, but it remains rather functional and sometimes lacks inspiration. Lowe’s has a chance to add value and curate a compelling assortment that help make it more of a destination. The same argument also applies to the softer side of home improvement in home decoration. Although Home Depot is making some moves here, it is not a core focus for the company, so there’s somewhat of a gap in the market that can be exploited.
Looking ahead, we remain confident about Lowe’s internal strategy. Ellison and his team appear to have a strong grasp of what the business needs and have, so far, been good at executing change. However, we are less certain about external conditions. The market isn’t falling off a cliff, but growth is slowing, and consumers are becoming more cautious. This could start to impact results as we move into 2020 and Lowe’s begins to lap tougher prior-year numbers. On balance any slowdown would affect Lowe’s more than its main rival, mostly because it has a higher proportion of amateur and occasional DIY shoppers who are more likely to forgo buying.
Neil Saunders is managing director of research firm GlobalData Retail.