Consumer Spending Is Shifting: Should You Still Buy Lowe’s Stock?
Lowe’s stock was one of the biggest winners during the pandemic. This is because the pandemic gave Americans two things: stimulus checks and lots of free time. With a little spare cash and nothing to do, people were inspired to tackle projects around the house. But, of course, no project can be completed without a trip to Lowe’s. Two years later, the pandemic quarantines are finally all but over and Lowe’s stock is down 30% YTD. Is this is good opportunity to buy the dip in a company that owns a duopoly in the home improvement industry? Let’s take a look.
Lowe’s (NYSE: $LOW) Most Recent Earnings
If you’re not familiar, Lowe’s is one of the largest home improvement retail chains in the world. In 2021, Lowe’s operated 2,197 stores across the United States and Canada. It is the second-largest hardware chain in the world behind The Home Depot. Together, The Home Depot and Lowe’s own the majority of the home improvement market. When just two companies control the market, it’s known as a duopoly.
In April, Lowe’s reported quarterly revenue of $23.66 billion for FY Q2 2022. This was down 3% from last year. Lowes also reported a net income of $2.33 billion which was up just 0.5%. Lowe’s also pays a dividend yield of 2.27%.
The last three quarters haven’t been particularly impressive for Lowe’s. Here’s one reason why.
Tough YoY Comparisons
The pandemic created a nightmare scenario for many businesses. But, as mentioned, home improvement retailers actually faired quite well. In particular, Lowe’s experienced a 24% spike in revenue, from $72.15 billion to $89.6 billion. This is impressive for a massive company like Lowe’s which already operates over 2,000 stores. Consequently, Lowe’s stock rose nearly 120% from 2020 to its all-time high in 2022.
Now, the quarantine pandemics are mainly over. Consumer spending is shifting away from home improvement towards other categories such as travel and dining out. This transition isn’t necessarily hurting Lowe’s sales, but it’s not helping either. The toughest thing for Lowe’s stock right now is the tough year-over-year comparisons. Since Lowe’s had such a stellar 2021, 2022 looks very average by comparison. This trend could continue through the rest of the year.
Lowe’s essentially had a 4.0 GPA in 2021. In 2022, it’s earning a 3.75 GPA. Still good, but not when you compare it to a 4.0.
Fortunately for shareholders, Lowe’s has a plan in place to start growing again.
Lowe’s 2022 Strategy
In 2022, Lowe’s strategy is to go after the professional market. This means that it wants to focus on serving customers that own construction businesses, as opposed to do-it-yourselfers.
Lowe’s estimates that the professional market is worth approximately $450 billion. If it can expand this segment of its business then it should be able to start growing revenue again. Part of its plan to grow this segment is to institute professional services in its stores including loaders, drop zones, and an entirely separate customer relationship management (CRM) software.
On top of that, here are three other factors that Lowe’s thinks will accelerate its business:
- Increased wear and tear on homes due to remote work
- Baby Boomers deciding to age in their home
- Strong home price appreciation
Additionally, Lowe’s is in the process of transitioning to an omnichannel strategy. This type of strategy means that Lowe’s customers will be able to buy products online, pick them up curbside, as well as buy them in a store. Lowe’s enhanced digital experience will even allow customers to enjoy next-day (or even same-day) order fulfillment.
Omnichannel strategies have been particularly effective for other major retailers. In particular, Dick’s Sporting Goods has had a lot of success with an omnichannel strategy. Offering customers more ways to shop helps improve the customer experience, which typically leads to more sales.
Final Thought: Should You Buy Lowe’s Stock?
Lowe’s has an incredibly strong business and is a runner-up in a large market. The DIY home improvement market has been growing for years and is proven to be pandemic-resistant. These are both strong reasons to consider buying Lowe’s stock.
Additionally, since Lowe’s stock has had a dismal start to 2022, its valuation has improved. Lowe’s now has a price-to-earnings ratio (14.5) that is lower than its rival The Home Depot (17.9). This metric could be a sign that Lowe’s is valued more cheaply relative to The Home Depot. However, P/E ratios often don’t tell the full story.
Another reason to consider buying Lowe’s stock is that its management team is committed to providing value to shareholders over the long run. This is evident through Lowe’s stock repurchase plan and strong dividend payments. Lowe’s plans to repurchase $12 billion in stock during 2022 and pays a 2.30% dividend yield. In general, companies don’t repurchase shares of stock unless the business is performing incredibly well. This is a sign that Lowe’s stock is a relatively safe bet for investors.
The biggest thing to be aware of before buying Lowe’s stock is the risk of inflation damaging its business.
What’s inflation risk?
Lowe’s sells lots of products that rely directly on raw materials. For example, it sells plywood and a number of other lumber products, plenty of steel products, fertilizers, etc. Right now, the prices of most raw materials are skyrocketing. If this doesn’t let up, it could squeeze Lowe’s profit margins and reduce its profitability. Or, it could force Lowe’s to increase its prices which could potentially hurt Lowe’s sales.
A few major retailers have already been hurt by inflation. Notably, Target. Target’s costs have increased but it has so far refrained from raising prices, so as to not alienate customers. This is one of the main reasons that Target’s stock slumped 30% in May. If you are considering buying Lowe’s stock, be sure to keep this inflation risk in mind.
I hope that you’ve enjoyed this Lowest stock forecast! Please remember that I’m not a financial advisor and just offer my own research and commentary. As usual, please base all investment decisions on your own due diligence.
About Teddy Stavetski
A University of Miami grad, Teddy studied marketing and finance while also playing four years on the football team. He’s always had a passion for business and used his experience from a few personal projects to become one of the top-rated business writers on Fiverr.com. When he’s not hammering words onto paper, you can find him hammering notes on the piano or traveling to some place random.