EUR 850.00 For Business Accounts Only

Morningstar | Lowe’s evolution to defend its brand and cost advantages kick off new leadership team.

Lowe's is the second-largest home-improvement retailer globally, with annual revenue of $69 billion, and has established itself as a solid operator. Its scale enables consolidated purchasing power, leading to a low-cost position, while an automated distribution network puts vendors, distribution centers, and stores on one platform, driving operational efficiency. Lowe’s logistics system permits large-scale purchase orders at a discount, giving it a low-cost edge. The firm retains some of the cost savings and passes the remainder on to its consumers through low everyday prices. These competitive advantages generate positive economic rents and support a wide economic moat.With CEO Marvin Ellison recently taking the helm and a massive overhaul of the C-suite and board at Lowe’s over the past year, we expect structural changes to continue getting under way. Our confidence that Lowe's can capture profit growth is rising, thanks to articulated efforts to improve inventory managment and the supply chain and to wind down the underperforming Orchard Supply brand, leading to better working-capital efficiency. Additionally, we believe Lowe's still has opportunities in box growth in underserved domestic markets (city) and international locales (boosted by Rona), as well as broader professional penetration, particularly with the tie-up of Maintenance Supply Headquarters and Central Wholesalers. This sets our sales forecast to rise 3% on average over the next five years versus Lowe's goal for 4%-plus growth.We expect fresh financial goals from management in December 2018, updating existing objectives, including operating margins of 11.2% and returns on invested capital of 22% in 2019. The targets imply more than 200 basis points of operating margin expansion in 2019, a pace Lowe's couldn't even capture coming out of the housing recession. We still think a stable housing market, rising household formations, and consumer confidence will lead consumers to spend more in the home-improvement category, supporting sales growth and expense leverage. However, with ongoing initiatives pressuring near-term profitability, we forecast 2019 operating margins of below 10% and ROICs of 21%.