It’s official. After years of falling behind rival Home Depot (NYSE:HD) on several fronts, Lowe’s Companies (NYSE:LOW) is finally starting to close the gap. By some measures it’s even outperforming its bigger competitor, including the one most important to investors; Lowe’s stock is leading Home Depot stock by leaps and bounds for the past year.
There’s still more work to be done, to be sure. And despite the usual post-earnings optimism the company was sporting following Wednesday morning’s Q4 report, the housing market is undeniably facing a headwind. The question is one of degrees.
Regardless, it’s increasingly difficult to not replace HD with LOW stock as the go-to name within the home improvement arena.
New CEO and Lowe’s Stock
The credit largely goes to CEO Marvin Ellison. After only seven months on the job, the former Home Depot executive has Lowe’s humming again. Its stores have the right and adequate inventory to meet the needs of contractors as well as DIYers. Meanwhile, his renewed focus on customer service has made a trip to its stores a pleasant experience again.
Much of Ellison’s work, though, has been largely out of sight of customers, even if they’ve been a beneficiary of those improvements.
One of Ellison’s first missions after taking the helm in July of last year was a top-down overhaul of Lowe’s technologies. This included a rethinking of inventory management solutions, but most of all it was a means of connecting with more shoppers on the web. While only about 5% of the company’s sales are done online, that figure is growing fast.
Also noteworthy is that 60% of online orders are retrieved in its stores, setting up another opportunity to make an add-on sale.
Lowe’s Stock and Q4
The fruits of Ellison’s labor are starting to bloom. Last quarter’s same-store sales growth of 1.7% may have fallen short of the 2.1% improvement analysts were modeling, but income of 80 cents per share of Lowe’s stock was better than the 79 cents the pros had estimated, and up 8.1 year-over-year despite flat revenues.
The wider margins are the result of shedding poor businesses. Ellison has been closing unprofitable stores in North America, and has completely shuttered its struggling Orchard Supply unit.
Last quarter’s same-store sales growth of 2.4% in the U.S. still doesn’t match up with Home Depot’s 3.7% comparable sales growth for the quarter ending in January. But, Oppenheimer analyst Brian Nagel notes that the 1.3 percentage point difference is “the narrowest it has been in a while.”
The difference may even be narrower for the quarter currently underway. In January alone, Lowe’s same-store sales growth of 5.8% outpaced Home Depot’s figure of 4.1%.
It was enough to prompt Joe Feldman, senior managing director at Telsey Advisory Group, to say that “Lowe’s has an opportunity to close that gap. We don’t expect them to completely close it, but we expect them to narrow it. And if they can narrow it and bring up their profitability over the next year or two, that will certainly help the stock.”
Looking Ahead for Lowe’s Stock
If Lowe’s is to close that gap though, it’s going to need continued growth from an uncertain housing market.
Ellison feels good about the foreseeable future on that front, commenting: “U.S. macroeconomic fundamentals remain sound for 2019, and we will continue to implement process and technology improvements to capitalize on the immediate opportunity to improve results.”
Ellison added during the conference call “As home prices are increasing, consumers are staying in their homes longer and because of their improved financial position, they are investing in their homes.”
The data more or less jibes with Ellison’s feel for the home improvement and remodel market. The Joint Center for Housing Studies of Harvard University expects spending on remodels to grow 5.1% this year.
As for new construction, however, the jury is still out. January’s new home sales in the United States fell 8% year-over-year, and December’s housing starts fell 10.2% year-over-year to a two-year low rate of 1.08 million.
Still, the company is optimistic, offering 2019 profit guidance of between $6.00 and $6.10 per share of Lowe’s stock, versus analyst estimates of $6.04. Lowe’s is looking for total revenue growth of 2% on same-store sales growth of 3%.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.
