Improvement in consumer spending and the overall business environment in the U.S. in the second quarter bodes well for Lowe’s.
According to Trefis, which analyzes how companies’ products impact stock prices, the domestic housing industry has regained momentum, after a slight slump in the early part of the year. Sales to professional (pro) customers should also boost sales for Lowe’s.
Comparable sales growth for the pros business, which forms around 30% of the net revenue for Lowe’s, was three times the company average in the first quarter, Trefis noted.
“In addition to higher anticipated pro customer sales, sales to do-it-yourself consumers is also expected to grow due to higher consumer spending this quarter, especially on durable goods,” Trefis noted. “Sales for the retailer in Q1 missed consensus estimates as bad weather conditions kept consumers from spending on home improvement, primarily on outdoor projects. However, sales in the home improvement market are expected to improve this quarter due to pent-up demand, as consumers engage in repair and retrofitting activities. Although Lowe’s reported only a 0.9% comparable sales growth in Q1, strong early sales in May and the estimated increase in home improvement sales in Q2 could help the company reach its 2014 target of 4% comparable sales growth.”
For the second quarter, Lowe’s sales rose 5.7%, to $16.6 billion from $15.7 billion in the second quarter of 2013, and comparable sales for the quarter increased 4.4%. For the six-month period, sales were $30.0 billion, representing a 4.2% increase over the same period a year ago, and comparable sales increased 2.8%.
What’s more, Lowe’s reported second-quarter net earnings of $1.04 billion for the quarter ended Aug. 1, 2014−a 10.4% increase over the same period a year ago.
“We believe home improvement spending will continue to progress in tandem with strengthening job and income growth,” Robert A. Niblock, Lowe’s chairman, president, and CEO said during the company’s Aug. 20 conference call. “Our year-to-date sales performance, together with our previous assumptions for the second half of 2014, result in a modest reduction to our sales outlook for the year. Our diluted earnings per share outlook is unchanged, which is a testament to our keen focus on profitability.”
Lowe’s’ business is impacted by the number of house sales, as new occupants spend on home improvement supplies, construction products, and services. Macroeconomic factors are starting to favor growth in this market, Trefis noted, as seen by the increases in home sales in the second quarter.
Hurt by the overall slowdown in economic activity, along with high lending rates, sales of existing homes declined from a seasonally adjusted annual rate (SAAR) of 4.87 million in December to 4.62 million in January, 4.6 million in February and 4.59 million in March. [1] In fact, sales in March represented a year-over-year decline of 7.5%. New home sales also remained low, and fell to a SAAR of 384,000 in March from 449,000 in February. However, following the first quarter, house sales have picked up in the U.S. Existing homes sales improved in April, May, and June to reach a SAAR of 5.04 million, which is the highest sales figure since seen in October last year.
Home Depot, the main competitor for Lowe’s, expects home prices to grow by 6% in 2014, which although lower than the rise in 2013, reflects steadily growing incomes, affordability, and consumer demand.
According to the Home Improvement Research Institute, home improvement product sales in the U.S. are expected to rise to $309 billion this year, up 6.5% year-over-year, after rising 4.2% in 2013. Although Home Depot leads the domestic home improvement market with around 27.2% market share, Lowe’s is also well positioned in this market with an 18.4% value share.
Lowe’s acquired Orchard Supply Hardware, a neighborhood hardware and backyard store focused on paint, repair and the backyard, in August 2013.
As a result, Lowe’s’ store count increased by 72 new units, and Orchard stores represented 2% of the net sales in 2013. Trefis predicts that the acquisition of Orchard stores is expected to strengthen Lowe’s’ presence in California, where both Home Depot and Sears have a significant presence. Home Depot had a massive 232 stores in the densely populated California state at the end of 2013, more than double the store-count for Lowe’s in the state.
“As Orchard stores are primarily located in California, Lowe’s could boost its sales in the Western part of the country, given the improved economic conditions and higher pro sales expected due to housing recovery,” Trefis noted. “Lowe’s could also grab additional market share in the region, especially from Home Depot.”
As of August 1, 2014, Lowe's operated 1,837 home improvement and hardware stores in the United States, Canada, and Mexico.