Lowe’s Companies (LOW) is the world’s second-largest home improvement retailer, with sales of $72 billion in FY20. Based in Mooresville, North Carolina, the company operates 1,977 home improvement and hardware stores, reports Chris Graja, an analyst with Argus Research, a leading independent Wall Street research firm.
We believe that CEO Marvin Ellison has the experience and ability to improve operations and raise profitability at Lowe’s. The company has improved its business analytics, upgrading its website, and streamlining its Canadian operations, which should lead to better margin performance and inventory turnover.
Lowe’s delivered strong comparable sales and showed operating and financial discipline in 1H21, which encompassed the first phase of the COVID-19 pandemic.
he global health crisis has caused investors to differentiate between business models that are well positioned for the future and those that face significant challenges. LOW’s 1H performance supports our view that the company is well positioned to deliver future earnings growth.
We believe that the shares stand out for diversified investors who are looking for exposure to discretionary retail at financially strong companies. Mr. Ellison spent more than a decade improving customer service and efficiency at Home Depot.
More recently, he served as CEO of J.C. Penney. We believe his recent experience in the very difficult department store business will give him a sense of urgency to constantly reduce costs and improve procedures at Lowe’s.
He emphasized that he will look at whether Lowe’s is earning appropriate returns on its investments and noted on the 3Q20 call that the company would not repeat some unprofitable discounts.
LOW missed some sales of appliances and holiday merchandise because it concentrated its marketing on Black Friday and missed an early surge of demand at the beginning of November. Among his first moves was to hire David Denton as CFO.
We have known Mr. Denton for many years going back to his role as CFO of CVS. He has successfully managed a complex organization, emphasized shareholder-friendly dividend increases and share repurchases, and provided clear financial guidance and objectives.
Our bullish thesis is more dependent on business improvement than the macro environment. We believe that the drivers of post-pandemic growth remain the same. There has been significant underinvestment in housing.
About 70% of U.S. homes are more than 25 years old and likely in need of upgrades and repairs. Private fixed residential investment entered the current recession near a 66-year low, at 3.1% of GDP, and well below the average of 4.6% since 1946.
We believe that sheltering-at-home has given consumers the time and inclination to take on home improvement projects. LOW is a potential beneficiary if consumers reallocate a portion of their spending from traveling and eating out to working, relaxing and studying in a comfortable home and yard.
We are raising our target price to $188 from $170. The company executed well in a difficult environment in the first half of the year and its e-commerce platform is delivering strong results.
The first half performance bolsters our confidence in CEO Ellison’s turnaround plan and it appears that strong demand for home improvement products is continuing in 2Q. We are reiterating our "buy" rating and raising our target price from $170 to to $188 per share.
