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Analyst Blog

On Dec 11, 2013, we reiterated our long-term Neutral recommendation on home improvement retailer, Lowe's Companies Inc. (LOW - Analyst Report) with a target price of $50.00. This was based on company’s robust third-quarter fiscal 2013 results, expansion initiatives and its enhanced merchandise. However, a sluggish macroeconomic backdrop and stiff competition are challenges to this Zacks Rank #3 (Hold) stock in the near term.

Why the Reiteration?

Being the world’s second largest home improvement retailer, Lowe’s is well positioned to benefit from resurgence in the housing market. The company is closing underperforming stores and its strategy of enhancing customer-shopping experience and enhancing products will likely help it generate incremental sales. Moreover, the company’s sustained focus on price management and adding extra labor hours will expectedly boost its market share.

Moreover, the recent acquisition of ATG Stores, one of the major online retailers of home improvement and lifestyle products, and Orchard Supply Hardware Stores will facilitate broadening of product assortments and will help in competing in penetrated markets.

Further, a gradually recovering housing market stimulated Lowe’s strong third-quarter fiscal 2013 results. Both the top and bottom line improved significantly and easily surpassed the Zacks Consensus Estimate. Lowe’s raised its outlook for fiscal 2013 and now expects sales to rise by nearly 6.0% and comparable store sales by about 5.0%.

On the flip side, heavy job losses and reduced access to credit have led to a sharp fall in consumer discretionary spending on big-ticket items. With the global economic environment having not yet fully recovered, we believe that spending on big remodeling projects will likely be difficult until the housing market fully stabilizes and consumer-spending rebounds. Also, stiff competition from other home improvement retailers such as The Home Depot, Inc. (HD - Analyst Report) may thwart the company’s growth prospects.

Other Stocks to Consider

Some better-ranked stocks in the home improvement sector include Builders FirstSource, Inc. (BLDR - Snapshot Report) and Lumber Liquidators Holdings, Inc. (LL - Snapshot Report). While Builders FirstSource carries a Zacks Rank #1 (Strong Buy), Lumber Liquidators Holdings has a Zacks Rank #2 (Buy).

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