With more time being spent indoors amid the coronavirus pandemic, home improvements projects are being widely adopted to suit work-from-home, remote schooling and entertainment needs. This has turned out to be an upside for several home improvement market players such as Lowe’s Companies, Inc. LOW. The trend was well exemplified in the company’s third-quarter fiscal 2020 results, with higher demand fueling growth across merchandise segments as well as online. However, higher pandemic-led expenses have been a snag for the company. In fact higher expenses are likely to pressurize the company’s operating margins in the fourth quarter. Let’s delve deeper.
Solid Demand Continues to Add Cheer
During third-quarter fiscal 2020, Lowe’s comparable sales in the U.S. home-improvement business rallied 30.4%. During the quarter, the company’s home improvements business was fueled by broad-based growth across all merchandising departments, DIY (do-it-yourself) and pro customers as well as growth in store and online. In fact, all 15 merchandising departments delivered positive comparable sales (comps), exceeding 15%. Growth in lumber was the strongest, backed by demand from pro and DIY customers. Moreover, the company witnessed growth in areas such as home decor, lawn and garden as well as seasonal and outdoor living.
Markedly, the company’s pro customers have been a significant growth driver. Prudent partnerships and multi-year tool-rental program are helping the company provide pro customers with a broad range of assortments that suit their specific home improvement and maintenance needs. During third-quarter fiscal 2020, pro sales were solid with comps exceeding 20%.
Strong Online Wing
Lowe’s strong omni-channel capabilities have been boosting online sales for a while. Notably, sales in lowes.com surged 106% in fiscal third quarter, wherein online penetration was 7% of total sales. Increased demand from DIY and pro customer towards contactless shopping options has been driving the company’s online sales.
We note that, with the replatforming of lowes.com to the cloud, the company has been able to enhance customers’ online shopping experience by improving services such as online delivery scheduling, search and navigation features as well as order tracking. Speaking of delivery capabilities, the company is planning to install Buy Online Pickup in Store self-service lockers across all U.S. stores. Going ahead, management believes that its online business model has tremendous potential to grow, backed by an efficient technology team and superior cloud-based platform
Headwinds in the Way
Higher expenses associated with operating amid the pandemic have been a concern for the company. Up until the third quarter, the company has spent more than $800 million for providing pandemic-related support to hourly associates. For the fourth quarter, management expects to incur COVID-related operating expenses of nearly $75 million to support safety and cleanliness in stores. Markedly, Lowe’s expects adjusted operating margin in the fourth quarter to be almost flat with prior-year quarter’s levels, owing to pandemic-related operating expenses, cost of $150 million related to store layout resets in the United States and investments to expand the supply chain network.
We expect Lowe’s top line to keep gaining from consumers’ inclination toward home improvements, core-repair and maintenance activities. This is expected to provide cushion against rising expenses. Markedly, this Zacks Rank #3 (Hold) company’s shares have gained 25.5% in the past three six compared with the industry’s 16.1% rise.
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