Changes Under Way at Lowe's, Market Applauds
New CEO Marvin Ellison is altering the wide-moat business by winding down the Orchard Supply brand and introducing an inventory rationalization plan.
With Marvin Ellison taking the helm at the beginning of July and a massive overhaul of the C-suite, we aren’t surprised that changes are underway at Lowe's (LOW). Taking his first step to alter the business, CEO Ellison announced the wind-down of the Orchard Supply brand, which was acquired in 2013 and has troubled the wide-moat company, generating a $76 million impairment in 2016. He also announced an inventory rationalization plan; both are set for execution over the remainder of the year. Given that Lowe’s inventory days (92) were around 30% higher than Home Depot’s (70) at the end of 2017, there should be ample opportunity to improve working capital efficiency, and with an executive team with extensive retail experience at topnotch category leaders, execution should be seamless.
Expenses of $230 million from the wind-down cost Lowe’s $0.21 per share in the second quarter, and another $390 million-$475 million is expected in the second half of 2018, leading to one-time charges around $0.60-$0.65 per share for the full year, by our estimate. The remainder of Lowe’s GAAP earnings guidance downgrade (to $4.50-$4.60 per share from $5.40-$5.50) comes from inventory management initiatives. These two efforts should better streamline the business and lead to improved operating metrics over time as a focus on faster inventory and cash conversion metrics could generate meaningfully better cash flow. We expect Lowe's will lay out a more detailed road map of changes ahead and the potential benefit these efforts could have on the longer-term operating margin profile at the company's investor day later this year.
We don’t plan any immediate change to our five-year outlook, which calls for comparable-store sales growth that averages 3%, a top line that rises slightly faster than comps, and low-double-digit operating margins. As a result, we don’t plan to materially alter our $94 fair value estimate and view the shares as modestly overvalued.
|Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.|
Jaime M. Katz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.