Lowe’s Companies, Inc.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 3/5

Lowe’s Companies, Inc. is a home improvement retailer in the United States and Canada that provides building materials, home decor, and other related products and services to both DIY and professional customers.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Lowe’s operates in a relatively concentrated and mature market, the home improvement retail sector. Its primary revenue drivers include the sale of:

  • Lumber and building materials.
  • Tools and hardware.
  • Home decor and appliances.
  • Lawn and garden products.
  • Maintenance, repair, and operations products.

Lowe’s is the second-largest home improvement retailer, trailing behind Home Depot, which makes for intense competition. However, Lowe’s also has strong ties to professional and DIY customers.

  • Home Improvement Market: This sector is generally tied to housing and consumer spending trends. While this can provide fairly consistent demand, this also makes the company vulnerable to down turns in the housing sector and periods of reduced consumer spending.
  • E-commerce Growth: E-commerce is rapidly growing and is a significant competitive factor.
  • Professional Segment Growth: There is growth in the professional segment of the industry which prefers delivery, bulk ordering and a variety of services that cater to the professional workers.
  • Sustainability: Environmentally-conscious consumers increasingly expect sustainable building materials and eco-friendly services, making it an important part of future value creation.

Competitive Landscape

The home improvement retail industry is dominated by a few large players: Lowe’s is primarily competing with Home Depot. The industry also sees competition from smaller players, such as local hardware stores, DIY suppliers, as well as large ecommerce sellers.

Key competitive factors include:

  • Pricing Power The retailers are mostly price takers which reduces margins and pricing power.
  • Scale and Supply Chain: The big players enjoy significant scale economies and can reduce cost of goods sold, which gives them better returns.
  • Brand Loyalty: Brand loyalty is generally low among consumers in this industry. There is a large overlap among customers of most of the retailers.
  • Customer Experience: The focus on customer experience is growing, and hence customer-oriented services are becoming more important for customers.
  • Location and Accessibility: Location and accessibility of a store are very important for consumers.

Lowe’s Financials

Lowe’s fiscal year ends on the Friday closest to January 31. Therefore, figures from the 10-Q are not entirely comparable because different numbers of weeks are in each of the 3 months.

Income Statement Analysis:

  • Revenue: Lowe’s total sales for the three-month period ended August 4, 2023, was $24.9B, which is 20.4% of the $119.4 billion revenue made in the fiscal year 2022. Total sales in the three-month period ended November 3, 2023, totaled 23.5 billion, 20% of 119.4 billion in 2022. There was a clear decrease in the revenue of 2.5 billion from previous year to the corresponding quarter of 2023. For the nine-month period ending November 3, 2023, revenue was $74.1B, a 5% decline YoY.
  • The company derives most of its revenues from the sales of building materials, home decor and appliances, tools and hardware, and lumber. Sales are also made through e-commerce channels.
  • Cost of Sales: The cost of sales is $17.3B and $16.3B for the respective three-month period of 2023.
  • Gross Margin: The company had a decent gross margin for both three month periods, showing the effectiveness of its procurement strategy.
  • Operating Expenses: The total operating expenses are $5.4B and $5.5B in three-month periods ended August 4 and November 3, 2023. It increased by almost 100million. In general operating expenses are steady. This makes its very hard for any new retailer to make competitive entry.
  • Operating Income: As a result of lower revenue and steady operating expense the company is seeing a lower operating income in 2023 compared to previous year.
  • Net Earnings: Both net earning are lower compared to last year at 1.5 billion and 1.7 billion respectively. This is due to higher expenses and lower revenue. The decrease in total revenue has hit the profits.
  • Diluted Earnings Per Share: Diluted Earnings Per Share stands at $2.99 for the three-month period ended August 4 and $3.08 for three-month period ended November 3. There was a dip from previous year. This number reflects the overall profitablity and efficiency of the company.

Balance Sheet Analysis:

  • Current Assets: The company has $44.2B and 42.2B in current assets respectively for the three-month periods ending in August 4 and November 3 2023 respectively. The majority of the current assets are composed of cash, short term investments, inventories, and receivables.
  • Fixed Assets: The net property, plant and equipment stand at 17.2 Billion and 17.1 billion for the same period. This represents a massive investment in infrastructure.
  • Total Assets: Total assets stand at roughly $52B for both periods, and shows no change over the past 3 months, indicating the stability of the company’s asset base.
  • Current Liabilities: The current liabilities of the company are $18.2B and 17.8B respectively, and majorly consists of accounts payables, accrued expenses, and deferred revenues.
  • Long-Term Debt: Long-term debt represents a good percentage of the company’s balance sheet.
  • Total Liabilities and Stockholder Deficit: The total liabilities and shareholder deficit is ~$44.2B and ~$42.2B, respectively. The company has a considerable shareholder deficit.
  • Equity: The company has a deficit in its shareholder’s equity, which is a result of share repurchases.

Cash Flow Analysis:

  • Cash from Operations: Positive for both three month periods, which reflects that they are generating adequate cash from their operations to support daily business operations and investments.
  • Cash from Investments: The Company has net outflows from the investments for both of these three month periods which reflects that they are heavily investing in growth and operations.
  • Cash from Financing: Cash flow from financing for both three month period is negative and this is in general due to repayments and share repurchases.

Overall the company’s financials have stayed almost similar compared to the past year, which is a show of stability, but the increase in operating costs and the decrease in total revenue is a concern for the business going forward.

Moat Assessment: 3 / 5

Lowe’s has a narrow but solid moat based on:

  1. Scale: Lowe’s benefits from its large distribution network, which makes it difficult for smaller players to compete with their delivery speed and reach. But this is not a wide moat because Home Depot is the biggest player in this industry and have much bigger capacity than Lowe’s.
  2. Location: The company’s locations in small and big cities have given it a local presence that would be hard to imitate by online retailers. This also helps it reach out to both DIY and professional consumers. But again, the competition is so intense that every other retailer in this space also has a good location.
  3. Customer Experience: The store experience, the advice the experts provide, the service that is given to the customer and the ability to get the right products also create high switching costs for customers, which makes it hard for them to change to a new vendor.

The company still needs to work hard to create a proper differentiation. Given the increase in competition from ecommerce companies, it might be hard for the company to keep its moat. The rating is based on a mix of positives and negatives factors, making a moat score of 3/5 as a decent rating for this business.

Legitimate Risks

  • Housing Market Slowdown: Any downturn in the housing market can decrease consumer spending and negatively impact Lowe’s financials, mainly revenues.
  • E-commerce Competition: The company has to compete with aggressive e-commerce companies with lower prices, and a more convenient mode of purchase.
  • Supply Chain Issues: Any disruption in the supply chain or increase in prices of raw materials can hurt Lowe’s margins. It also increases its costs and can slow down its expansion plan.
  • Economic Downturn: Economic recession is likely to reduce demand for durable goods and can hurt the retail industry.
  • Inflation: High inflation can decrease the real-purchasing power of the consumer and also increases input and operating costs for Lowe’s.

Business Resilience

Lowe’s demonstrates a decent degree of business resilience. This is because of:

  • Focus on DIY and Pro Customers: Lowe’s serves both Do-It-Yourself (DIY) consumers and professional contractors, giving it a balanced customer base.
  • Well-Established Operations: They have a established network and brand identity which gives it a wide coverage.
  • E-commerce Integration: Lowe’s has moved its operation online.

Understandability Rating: 2 / 5

Lowe’s business model is generally easy to understand because it is a retail business. However, some specific factors make it slightly complicated, especially when trying to analyze and understand its financials:

  1. The competition that it faces from many big players and smaller players in the industry makes its long-term value creation hard to predict.
  2. The company has a big inventory with a complex supply chain, that spans across different regions. Understanding how this impacts its return on capital takes a good amount of due diligence.
  3. It is hard to understand the impact of fluctuations in market prices of raw materials on its profits.

Therefore an understanding level of 2/5 reflects the inherent complexities in its business model.

Balance Sheet Health: 3 / 5

Lowe’s has a modest but not great balance sheet.

  1. Lowe’s has a very large total debt, and its total liabilities exceed the total asset value. Though the company has good credit ratings, this is still a concern.
  2. The company has a negative total shareholders’ equity and this could be improved upon by a better use of funds in future.
  3. Cash and short term investment are significant, but the company also has other assets that are not as easy to liquidate quickly.

Based on this, a balance sheet score of 3/5 is justified.

Recent Concerns and Management Response

  • Weakening Consumer Spending: Due to inflationary pressures, consumer spending is decreasing and it might impact Lowe’s sales in near future. The management has stated that they are focusing on managing expenses to maintain profitability during times of low revenue.
  • Labor Market Higher wages are an issue and management is trying to improve employee retention and productivity through better training programs.
  • Impact of Acquisitions: In early 2023, Lowe’s acquired the Canadian Retail business of RONA inc, and the company is actively integrating it into its existing business model. This acquisition is expected to provide a better position in the Canadian market and boost its presence internationally.
  • Inventory Management: The company is also aggressively focusing on managing inventory by reducing it and rebalancing stocks to make them more relevant. This would help them reduce the amount of cash tied into inventory and make it more efficient.
  • Share Repurchase The company is actively buying back its own stock, and they plan to continue this practice as long as the company’s stocks are undervalues.
  • Cost Control Measures: The company has been focusing on cost control and supply chain efficiency to sustain its margins during current challenging times.
    • The company has increased its pricing discipline and is actively working to improve promotions.
    • The company has taken up steps to better manage operating expenses to make sure the company does not fall into a losses or loss profit margins.