After struggling to improve its expansion pace throughout 2017, Lowe’s (NYSE:LOW) finally managed a win in the fourth quarter. Revenue was surprisingly strong at existing locations, which pushed the full-year growth rate just above management’s target.
However, CEO Robert Niblock and his team forecast a slowdown for fiscal 2018 and warned that earnings will be pressured by the many investments they’ll be making into the business. In a conference call with analysts, executives explained why they think that spending will pay off in future years.
Here are a few highlights from that chat.
Breaking down the growth
We delivered comparable sales growth of 4.1%, exceeding our expectations, through compelling consumer messaging, strong holiday event performance, and integrated omnichannel customer experiences. — Niblock
Comps came in ahead of Lowe’s targets, putting full-year comps at 4% compared to the 3.5% management had predicted. That improvement closed the gap slightly with industry leader Home Depot (NYSE:HD), which grew at a 7.5% pace during the quarter and by a blistering 6.8% for the full 2017 year. Lowe’s growth came entirely from increased spending as customer traffic dipped by 0.8%. Home Depot, on the other hand, logged a 2% traffic boost during the quarter.
Gross margin for the quarter was 33.73% of sales, a decrease of 68 basis points from the fourth quarter of last year. We continue to take competitive actions, which were partially offset by the benefits from value improvement as well as early results from pricing optimization efforts. — CFO Marshall Croom
Executives weren’t thrilled with the reduced profitability that Lowe’s posted during the quarter. They had to cut prices in many instances to stay competitive, and gross margin also slipped due to increased sales of appliances. On the other hand, they were encouraged by early results from new pricing and promotion tools that helped apply price cuts more efficiently.
Plan of attack
We are actively working to improve conversion and gross margin while better managing inventory. — COO Richard Maltsbarger
Executives outlined a comprehensive strategic plan aimed at delivering faster, more profitable growth. It will include changes like increased employee training, a shift toward digital advertising, new investments in the e-commerce infrastructure, and a host of exclusive partnerships with brands like Sherwin Williams. “We are moving forward with urgency to improve our results,” Niblock said.
The new fiscal year
We expect continued housing tailwinds, including favorable trends in household formation despite near-term pressure on housing availability. — Croom
Lowe’s 2018 forecast calls for sales to rise by 3.5% to mark another year of underperformance against Home Depot, which is predicting a 5% increase this year. Lowe’s aggressive spending should also power a slight decrease in operating margin, management warned, down to roughly 9% of sales. Home Depot’s comparable metric is projected to hold steady at nearly 15%.
Looking further out
As we look at our results, along with our decision to accelerate strategic investments, we are reevaluating our long-term targets. — Croom
Lowe’s aggressive growth strategies should allow profitability to begin inching higher again after 2018, at around the time that comps speed up. However, management wants to collect more information about the long-term profit margin outlook as they apply some of their initiatives over the next few months. Niblock and his team plan to update investors on that point, and on Lowe’s wider rebound plan, in the retailer’s shareholder meeting in December.
Demitrios Kalogeropoulos owns shares of Home Depot and Sherwin-Williams. The Motley Fool has the following options: short May 2018 $175 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Home Depot, Lowe’s, and Sherwin-Williams. The Motley Fool has a disclosure policy.
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