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Lowe's Companies Inc LOW

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Lowe’s Set to Capture Operating Margin Gains Thanks to Retail Fundamentals Focus

Jaime M. Katz, CFA Senior Equity Analyst

Analyst Note

| Jaime M. Katz, CFA |

We plan to raise our $140 fair value estimate for wide-moat Lowe’s by around $5, updating our longer-term outlook after digesting the firm’s forecast following its investor meeting. We are set to make a few changes across our forecast that lead to this increase. First, we plan to adjust our 2021 outlook for improved profitability. Lowe’s currently expects a 2021 operating margin of 12%, while our model projects about 10.5%. This single-year productivity lift raises our intrinsic value by $5. Then, we expect to reduce our terminal selling, general, and administrative cost ratio by more than 100 basis points, to around 18%, as Lowe’s captures additional benefits from operating efficiencies, leading to another $5 in fair value upside. However, these gains are offset by two factors. One, the gross margin will improve less than we originally thought, with a terminal gross margin just above 33%, rather than the 34% we had modeled (as supply chain investments offset pricing gains). Second, capital expenditures should exceed the $1.7 billion average we forecast between 2021-24 (now likely to be closer to $2 billion annually). Impressively, Lowe’s could now reach nearly 13% operating margin in 2025, above the 11.5% we had been expecting.  

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Company Profile

Business Description

Lowe's is the second- largest home improvement retailer in the world, operating about 1,970 stores throughout the United States and Canada. The firm's stores offer products and services for home decorating, maintenance, repair, and remodeling. Lowe's targets retail do-it-yourself and do-it-for-me customers as well as commercial business clients. We estimate that Lowe's captures a low-double-digit share of the domestic home improvement market, based on U.S. Census estimates for market size.

1000 Lowe's Boulevard
Mooresville, NC, 28117
T +1 704 758-1000
Sector Consumer Cyclical
Industry Home Improvement Retail
Most Recent Earnings Oct 31, 2020
Fiscal Year End Jan 31, 2021
Stock Type Cyclical
Employees 320,000