Lowe’s (NYSE: LOW) investors were looking for mostly good news from the company in its fiscal third-quarter report. The home improvement giant is under new management, after all, and executives are taking aggressive steps to boost productivity and close their performance gap with rival Home Depot (NYSE: HD) .
The retailer’s actual results included a few bitter pills for shareholders, though, including surprisingly weak sales and profits. Below are a few highlights from the conference call that CEO Marvin Ellison and his team held with investors to put those challenges into perspective against Lowe’s long-term growth strategy.
Image source: Getty Images.
The challenge wasn’t the economy
As we look at our results, specifically our top-line underperformance both in stores and online, we see the issue as poor execution, not a macro[economic] concern.
Lowe’s reported surprisingly weak revenue, with comparable-store sales inching higher by just 1.5%. Home Depot, in contrast, expanded its business at a 5% rate.
Ellison said the market-share challenge wasn’t driven by any weakness in the economy, or even an issue with filling its aisles with shoppers. Instead, the company failed at a few basic retailing fundamentals, including in-store stocking levels and supply-chain management. As a result, many shoppers left without making purchases, leading to lower transactions and weaker profitability in a generally strong industry.
First things first
Our top priority this quarter was taking the necessary steps to build a sustainable foundation to position Lowe’s for long-term success by exiting underperforming stores of noncore businesses. This will allow us to intensify our focus on our core retail business.
Rather than focusing on fixing its day-to-day sales challenges, management said it spent most of its energy on big-picture restructuring this quarter. To that end, it has wrapped up a complete review of Lowe’s business and found more places to make cuts. This quarter, those moves included exiting the retailer’s Mexico operations and closing 20 underperforming stores in the U.S. and 27 locations in Canada.
Calling them difficult decisions to make, Ellison said the changes, which resulted in over $200 million of writedowns, “send a clear message that we’ll no longer pursue ventures that dilute our return on capital.” That metric sits at 8% today versus 38% for Home Depot.
Things might get worse before they get better
We are excited about the opportunity ahead of us, and we are working very hard to position Lowe’s for the future and to capitalize on the strong demand in a healthy sector. Our changes will take time, but we have a detailed plan in place to allow us to make steady progress with near- and long-term wins.
— William Boltz, executive vice president
Like rival Home Depot did a week earlier, Lowe’s described a generally healthy home improvement market that hasn’t been significantly hurt by the slowdown in homebuilding. However, the company lowered its sales outlook for the second straight quarter and now expects revenue to inch up by less than 4%. Its chief rival raised its outlook, meanwhile, to a 5.3% increase in the core U.S. market.
The challenges in inventory, supply, and the store shopping experience that hampered results in the third quarter are likely to continue through the holiday season. From there, Ellison and his team believe the improvements they’re making in these areas should begin lifting results early in 2019. At that point, Lowe’s is hoping that it can grow as fast, or faster than, the broader industry while simultaneously raising key financial metrics like profitability and return on invested capital.
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Demitrios Kalogeropoulos owns shares of Home Depot. The Motley Fool has the following options: short February 2019 $185 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Home Depot and Lowe’s. The Motley Fool has a disclosure policy .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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