Lowe's Keeps Neutral Recommendation - Analyst Blog

Being the world's second largest home improvement retailer, Lowe's Companies Inc. (LOW) boasts a proven strategy of investing in stores to enhance customer-shopping experience by improving point-of-sale and directional signage, and adding more product selection. The company's sustained focus on Everyday Low Prices, New Lower Price, Go Local and Specialty Sales initiatives have helped it to grow its market share. 

Lowe's, which competes with The Home Depot Inc. (HD), expects fiscal 2010 earnings between $1.37 and $1.40. Management projects sales growth between 3% and 4%, and comparable-store sales between 1% and 2% in fiscal 2010.

We also appreciate its approach of cutting new store growth targets in the current consumer environment. The company had opened 62 stores in 2009, significantly down from 115 stores opened in 2008 and 149 stores opened in 2007. Lowe's targets approximately 42 new store openings in fiscal 2010.

In the coming few years, Lowe's plans to concentrate more on private label brands, with a target of increasing its penetration to 18% from the current 15%. We believe that greater focus on private label products should facilitate margin improvement.

The company is also actively managing its capital. Lowe's is rationalizing its capital expenditures, including store-remerchandising efforts, to improve its return on investment. As a result, the company expects to generate substantial future cash flows. The company's strong liquidity will position it to drive future growth.

However, heavy job losses and reduced access to credit have lead to a sharp fall in consumer discretionary spending on big-ticket items. Although the economy is showing signs of revival, we believe that spending on big remodeling projects will likely remain under pressure until the housing market stabilizes and consumer-spending rebounds.

Moreover, the company's expansion in the regions it already serves could cannibalize its sales performance and decrease traffic counts, at its existing stores in the area. Consequently, this may have a negative impact on the company's overall performance. During third-quarter 2010, new store cannibalization lowered the comparable-store sales by about 30 basis points.

Given the pros and cons we prefer to have a Neutral rating on Lowe's. The company holds Zacks #3 Rank, which translates into a short-term Hold recommendation, and also correlates with our long-term view.

 
HOME DEPOT (HD): Free Stock Analysis Report
 
LOWES COS (LOW): Free Stock Analysis Report
 
Zacks Investment Research