Morningstar | Wide-Moat Lowe's Continues to Clean House as It Restores Focus on Core Box Profitability
Lowe's is the second-largest home improvement retailer globally, with annual revenue of $71 billion. 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. The firm retains some of the cost savings and passes the rest on to its customers through everyday low prices. These competitive advantages support a wide economic moat.With Marvin Ellison taking the helm in 2018, a massive overhaul of Lowe's C-suite and board ensued. Massive alterations to the supply chain and technology in the year ahead could temporarily crimp free cash flow, given that increased capital expenditure efforts ($1.6 billion in 2019) could take some time to bear fruit. However, our confidence that Lowe's can capture profit growth is rising, as these new efforts to institutionalize processes that were inefficient, including labor management, reset efforts, and inventory controls, could squeeze meaningful operating margin expansion out of the business if they are implemented properly. Furthermore, the wind-down of the Orchard Supply brand, a sale of the Mexico business, and the shuttering of smaller incremental businesses should lead to better working-capital efficiency. Lowe's offered fresh financial goals in December 2018, targeting a long-term operating margin of 12% and returns on invested capital of 35%. With 9.6% operating margin expected in 2019 (versus our 9.4% forecast), this implies around 250 basis points of upside over time. Our 10-year outlook calls for operating margin that rises to above 11% and adjusted ROICs of 32% in 2028. We still believe Lowe's still opportunities in underserved domestic markets (city) and via broader professional penetration, particularly with the tie-up of Maintenance Supply Headquarters and Central Wholesalers. Furthermore, a relatively stable housing market, consumer confidence, and rising household formations should lead consumers to spend more in the home improvement category, supporting sales growth and expense leverage.Lowe's Companies is a home improvement retailer. The company provides home improvement products in lumber and building materials, appliances, seasonal and outdoor living, tools and hardware, fashion fixtures, rough plumbing and electrical, paint, millwork, lawn and garden, flooring, and kitchens categories. The company provides installation services through independent contractors in product categories, including appliances, flooring, kitchens, lumber and building materials, and millwork. The company also provides extended protection plans for various products within the appliances, kitchens, fashion fixtures, millwork, rough plumbing and electrical, seasonal and outdoor living, and tools and hardware categories.
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