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Lowe’s Stock Research Report 2.8.2024

Ticker: LOW
Sector: Consumer Discretionary
Industry: Home Improvement Retailer
Headquartered: North Carolina, USA
Moat: Wide – Intangible asset – Brand, Cost advantages

Action at date of this post

Accumulate as of 2.8.2024
This is technically a buy opinion. Accumulate means if you are an investor that buys periodically then keep buying. If you do not own it but are looking to buy this is an indication to open a position of no more than 25% of your intended, total position.

Lowe’s Corporate Overview

Lowe’s Companies, Inc., founded in 1946 by Lucius Smith Lowe, is a retail giant in the home improvement industry. Originally a small hardware store in North Wilkesboro, North Carolina, Lowe’s has evolved into a Fortune 500 company with a vast footprint, encompassing over 1,738 stores across the United States, The company’s growth trajectory includes strategic acquisitions and expansions, allowing it to establish itself as a go-to destination for customers seeking a wide range of home improvement products and services. 

Lowe’s employs a multichannel approach to serve its diverse customer base. The company not only operates brick-and-mortar stores but also offers an extensive online platform, allowing customers to browse products, access helpful resources, and make purchases from the comfort of their homes. Lowe’s commitment to customer service is evident through its knowledgeable staff, project guides, and interactive tools designed to assist customers in planning and executing their home improvement projects. As Lowe’s continues to adapt to the evolving retail landscape, its dedication to customer satisfaction and its broad product offerings position it as a key player in the competitive home improvement market.

Lowe’s Segment Analysis

Lowe’s operates in two segments – brick and mortar retail and e-commerce. Within the two segments, the company sells third party brands as well as twelve of their own private label brands. Currently, Lowe’s online sales are 10% of sales which is up from 5% just 5 years ago. Of Lowe’s total sales 25% are to professional business customers and 75% to retail do-it-yourself customers.

Lowe’s Moat Source

Lowe’s wide moat comes from a number of areas. First, is brand awareness that the company has built with DIYers and professionals alike. It’s extensive distribution network that continues to get stronger and bringing shorter delays in moving goods to stores. Lastly, is the company’s negotiating power. With so money stores to fill, the company has significant bargaining power with vendors. This allows Lowe’s to offer great prices which creates a flywheel if value proposition.

Lowe’s Growth Outlook

Let’s start with the magical job that CEO, Marvin Ellison, has done in streamlining the business and turning it into a growth company. Since joining the firm in 2018, Ellison overhauled the C-suite and implemented a perpetual productivity plan that is not showing its efficiencies. The company jettisoned underperforming lines and sold off it’s non-US stores (Canada and Mexico). The current economic environment of an aging housing market, relatively high interest rates, firm housing prices and a positive wealth effect all point to continued spending on home improvements.

Lowe’s Total Home Strategy that seeks to: 1. Drive Pro Penetration, 2. Accelerate Online Business, 3. Expand Installations Services, 4. Drive Localization, 5. Elevate Products Assortment. The strategy has helped galvanize the company behind efforts to grow margins. With over 100 supply chain facilities including distribution centers and fulfillment centers, Lowe’s has streamlined its supply chain to shorten time to delivery. 

Inside the stores the company has focused on efficiency and reducing duplication of tasks. One of the big efforts has been to shift more in store staff to service and away from stocking. The rejigger in staffing has been possible by not only analyzing staffing needs but also deploying technology. In addition, the company continues to refine it’s higher margin private label brand offerings. Through analytics the company has learned that pros look for third party brands while the average customer who are less brand focused.

Growth avenues for the company remain private label margins, negotiating leverage with vendors and continued focus on improving inventory management. 

Lowe’s By The Numbers

Let’s be honest here. The balance sheet of Lowe’s has looked better, But, It’s not as bad as it looks. The company has a negative shareholder equity which means debt is more than assets. The reality is the company has been buying back shares pretty aggressively. I’m fine with retiring shares as long as they are being bought at reasonable levels. In Lowe’s case this is true. If we shift focus to free cash flow we see a steady producer with a high cash conversion. As for management effectiveness, ROIC/ROCE is in solid territory and trending higher. Lastly, gross margins are trending higher and are a focus of the company. 

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This website and associated newsletter along with its content/links are not financial advice. Nothing in this newsletter is an investment recommendation. All content is created for entertainment, educational, or informational purposes only. My strong buy, accumulate, hold, reduce or sell opinions are exactly that – opinions. Be sure to do your own research for your own particular circumstances or higher a professional advisor.

At the time of writing, the author holds a position in Lowes.

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