9 words from Lowe’s CEO investors should see

Lowe’s (NYSE: LOW) recently thrilled Wall Street with its latest quarterly earnings update. Of course, sales declined slightly until the end of July. But the business footprint is still much higher today than it was before the pandemic, with profits amplified by rising profit margins.

In a conference call with analysts, CEO Marvin Ellison and his team broke down these results and explained why they are so bullish about the home improvement industry over the next several years. Let’s take a look at some highlights.

Image source: Getty Images.

Nine words that say it all

Ellison has spent some time explaining why executives feel confident in the home improvement industry beyond the current boom of 2021. The demand for new housing currently exceeds supply by enough to involve years of continued strength in the market. housing market, for example.

But the biggest factor is home renovations and upgrades, which account for two-thirds of Lowe’s annual sales. The growth of this niche is heavily dependent on the constant rise in house prices.

“[People] see improvements and improvements to their home as an investment, not an expense, ”Ellison said, with this important caveat:“ As long as their home appreciates in value. “

This perception helps explain how Lowe’s and his rival Home deposit (NYSE: HD) have added tens of billions of dollars to their annual sales since the start of 2020.

Increase in margins

Lowe’s is on track to close its performance gap with Home Depot in terms of profitability. Years of efforts to improve the supply chain are finally paying off, and the operating margin for the quarter jumped to 14.5% of sales from 12.66% a year ago.

This measure will contract over the next six months, executives have warned. But Lowe’s is still aiming for an operating margin of over 12% in 2021, down from around 10% last year. Home Depot continues to lead the industry with almost 15%.

HD Operating Margin Graph (TTM)

HD operating margin (TTM) given by YCharts

Most of the credit for this narrowing gap goes to Lowe’s massive supply chain transformation project. “The foundation for this transformation is the company’s transition from a store-based delivery model to a market-based delivery model,” said Ellison. This new process is currently in place at the regional level and will be rolled out nationwide by the end of 2022.

Short-term outlook

Lowe’s takes a short-term hit from the collapse in lumber prices, but still sees the decline as positive in the long term. The crisis resulted in increased customer traffic early in the third quarter, for example, as people pulled the trigger on projects they had delayed when prices were higher.

The remainder of the outlook for 2021 is bright, given fundamental favorable winds such as rising home prices and intense consumer attention to home upgrades and maintenance. “Lowe’s is clearly ahead of our robust market scenario that we shared with investors in December,” said Executive Vice President Dave Denton.

That means sales are expected to rise again in 2021, to at least $ 92 billion, after jumping $ 17 billion last year to $ 90 billion. Compensation over two years will be 30%, according to management’s estimates.

There are many factors that could threaten this bullish outlook, including new outbreaks of COVID-19 and an economic downturn. But the core of the business should be strong throughout most industry cycles, as long as consumers continue to view their household spending as an investment rather than an expense.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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