Commentary

Reconstruction Of Lowe's Proving Difficult, But Sales Are Up

Although comparable sales rose 3.5% at Lowe's for the first quarter of 2019, the stock took a battering yesterday because earnings were less than Wall Street’s expectations and it adjusted its guidance downwards. Shares fell 11.85%.

“The unanticipated impact of the convergence of cost pressure, significant transition in our merchandising organization, and ineffective legacy pricing tools and processes led to gross margin contraction in the quarter which impacted earnings,” CEO Marvin Ellison says in the release announcing the quarterly results.

Translation: Since coming over from J.C. Penney last July after 12 years at Home Depot, “Ellison has replaced nearly the entire merchandising team to get more in-demand products on shelves as the company tries to close the gap with larger rival Home Depot Inc.,” writes  Reuters’ Uday Sampath.

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“While the new team helped Lowe’s record better quarterly same-store sales growth than Home Depot for the first time in three years, it was not fast enough in reacting to cost increases, crimping margins, which fell nearly 3%,” Sampath points out.

“Because of … the transition of our merchandising team, we literally had no visibility to those cost increases until the inventory that was increased in cost hit the P&L,” Ellison told analysts during an earnings call transcribed by Seeking Alpha.

“The same-store sales results are an indication that ‘customers are responding to our changes, and our approach to retail fundamentals is working,'" Ellison also said.

“Improving those fundamentals is what the transformation’s first phase entails, Ellison said, and has been his focus since he took over,” Katherine Peralta writes for the Charlotte Observer. Lowe's is based in Mooresville, N.C., an hour north.

“Under Ellison, the company has added several retail veterans (including former Home Depot executives) to its executive leadership team, closed dozens of stores, discontinued underperforming business units and recently began a revamp of stores, starting with one in Ballantyne, [N.C.]. The second phase of the transformation, Ellison said, is building off the first to ‘create stability’ in the business that should improve the retailer’s sales. The third is taking market share from rivals.” Peralta continues.

It’s also trying to improve its digital operation.

“We already knew that Lowe’s was burdened by technology that was far from best-in-class. Executives have said before its merchandising and pricing systems date to the early 2000s, making it practically ancient. Ellison said at a December investor day presentation that his employees are ‘at a competitive disadvantage with outdated and cumbersome systems,’” Sarah Halzack writes  for Bloomberg.

On the bright side, technologically speaking, online sales at lowes.com jumped 16%, which Ellison “attributed to the chain’s commitment to refurbishing its online presence. Lowe's has a history of technological misadventures -- take its website’s habit of crashing on Black Friday, for instance -- but Ellison said that the company’s tech team is committed to ensuring ‘the site operates the way we need it to operate,’” writes Áine Cain for for Business Insider.

“Another prong of the company's online strategy has centered on embedding ‘online merchants within core merchandising groups’ as well as constructing a direct fulfillment center outside of Nashville, according to Ellison,” Cain adds.

Ellison cited CIO Seemantini Godbole’s “deep understanding of the online space,” adding that the tech team is shifting from a mainframe-based platform to a cloud-based platform.

CNBC “Mad Money” host Jim Cramer urged investors not to bail on Ellison on CNBC’s “Squawk Box” yesterday, Jessica Bursztynsky writes for CNBC.com. “People have written off Ellison but he’s been there for five minutes,” Cramer said.

Lowe’s should be back to meeting Wall Street expectations by its third quarter, he predicted, echoing Ellison.

“For the year, Lowe’s now expects adjusted earnings between $5.45 and $5.65 a share, lower than its previous guidance of $6 to $6.10 a share,” write Sarah Nassauer and Kimberly Chin for the Wall Street Journal

“The guidance cut is likely the biggest issue driving the stock lower, said Budd Bugatch, retail analyst at Raymond James. 'Apparently, new management is finding that getting Lowe’s to where it believes it can be is still very much a work in progress,’ he said in a note,” Nassauer and Chin add.

But that’s the nature of any home improvement process, isn’t it?

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