By Neil Saunders
After a couple of quarters of lackluster performance, Lowe’s has produced a solid set of sales numbers as it starts its new fiscal year. Admittedly, the uplifts come off the back of a very soft prior year comparative—when Lowe’s had struggled to generate significant revenue growth. However, in our view, the figures provide an early indication that the recovery program instituted by Marvin Ellison is gaining traction.
The increase is particularly pleasing as it came against the backdrop of a period in which the weather was not favorable to home improvement. A prolonged spell of wet and cold across many parts of the country put back many outdoor DIY tasks that usually start to ramp up in the early part of the year. That Lowe’s was able to buck this trend is largely down to the various improvements it is making as part of its retail fundamentals framework.
Under this program, retail basics such as in-stocks, merchandising, and customer service are all being improved. The approach has been to look at individual categories and implement changes needed to raise standards. In an area like paint, for example, the impact has been positive and has resulted in higher conversion rates and spend. As more product areas are focused on, the momentum should build and provide some buoyancy to numbers across the remainder of this year.
While it is essential and prudent to focus on getting the retail basics right, the resulting initial fillip to sales essentially comes from working more effectively with existing shoppers and getting them to spend more. Once there has been a significant improvement across all categories we believe there is a further opportunity for Lowe’s to build out its customer base by capturing new shoppers. This is arguably more challenging as it will involve, at least in part, going head-to-head with The Home Depot.
The addition of the Craftsman range is a good example of how Lowe’s might be able to compete more effectively with its bigger rival. Since its introduction, this authoritative brand has created a lot of interest and has improved customer conversion and spending in the categories where it has been rolled out. The expansion of the label to new areas like outdoor power equipment should help Lowe’s to build further credibility, especially among professional customer segments.
Creating these sustainable points of difference and improving customer service in general remain vital to Lowe’s building destination status in the same way that The Home Depot has done over the past five years. As much as we believe Lowe’s is now on the right trajectory, we do not underestimate the difficulty of the task.
Unfortunately, the uplifts on the sales line have not translated into improved operating profit where income fell by 3.3% over the prior year. Some of this is down to cost pressures associated with the various changes being made and should course correct over the next 12 months. A lower income tax provision meant that while operating profit declined, net income increased by a respectable 5.8%.
Overall, we believe that Lowe’s is in a reasonable position. Operations are being improved and the sector it plays in is reasonably robust, even with a slowdown in growth. Nevertheless, there is a lot more work to do for Lowe’s to become a more competitive force in home improvement.
Neil Saunders is managing director of GlobalData Retail.