Lowe's started out as a small North Carolina hardware store, called North Wilkesboro Hardware Company, and it has become the world's second largest home improvement retailer and the seventh largest retailer in the U.S. Carl Buchan envisioned building a chain of hardware stores around the country. Lowe's has specialized in selling only hardware, appliances, and hard-to-find building materials. Lowe's reputation for low prices has been established by eliminating wholesalers and dealing directly with manufacturers. The rise in sales lead to more stores being opened in neighboring towns and throughout western North Carolina.
Lowe's became a publicly traded company in 1979 and it was around this time that U.S. housing became big business which led to professional builders becoming a large part of Lowe's business ("Lowe's annual report," 2009). In 1982, Lowe's had a profit of $25 million, during its first billion dollar sales year. Lowe's stores now attract a new type of customer called the do-it-yourself homeowners.
To accommodate both customer and contractors' needs, Lowe's enlarged its stores and increased the variety of merchandise. Lowe's has 1,640 superstores in 50 states and a dozen outlets in Canada. The Lowe's modern stores began in 1994 which consisted of store sizes of 85,000 square feet. Expansion of Lowe's stores is on average about one a week, the 117,000 square-foot stores in the larger metro areas and the newer 94,000 square-foot stores in the small to mid-sized markets. December 2007, saw Canada's first Lowe's store opening and the first stores in Mexico in February 2010.
Lowe's has about 40,000 products for its do-it-yourself customers and for professional builders as well as offering hundreds of thousands more by special order ("Lowe's annual report," 2009). With such a wide selection they have just about everything their customers need to build, repair, and enjoy their homes. Lowe's values haven't changed since it first opened its doors in 1946, the company remains committed to offering quality home improvement products at the lowest prices, while delivering superior customer service.
Technology:
Lowe's isn't big on disclosing much on how technology is incorporated into its business strategy, but Lowe's does offer real-time inventory monitoring, "item monitoring experience", labor planning, and centralized inventory replenishment ("Lowe's annual report," 2009). The tactics employed by Lowe's are often considered conservative. Home Depot has implemented automated checkout counters, but Lowe's alternative is to simply open more registers. There are signs in Lowe's stores that state if there are more than three people in line, a new register will be opened; being true to its word Lowe's has stood by this policy.
By mining company sales and customer data, Lowe's is able to select merchandise for its customers, gauge the success of promotions, and schedule its' employees based on sales. Data warehousing targeting customers who sign up for newsletters and catalogs, employ electronic data interchange tools to meld its operations with vendors, and aid store design. Lowe's has improved their business by integrating its operations with those of its suppliers. Compared to Home Depot, Lowe's has been able to successfully streamline many of its' business processes such as human resources and upgrading to PeopleSoft 8. People familiar with the technology used by Lowe's say the company is a lot like many retailers, with many applications that do not communicate well together. Despite this Lowe's is still able to pick projects that give it a better chance to outdo Home Depot.
Lowe's competitive advantage is that it has a better reputation than its competitors, especially among female customers. They've won more recognition for having a much more appealing store design (Hindo, & Byrnes, 2007). They have been using this advantage as they move more and more into Home Depot's territory. Also, Lowe's distribution center model (hub and spoke) has gained the company a competitive advantage in the home improvement market as well (Hudson, 2003).
Knowledge Base:
Lowe's vision is that it will provide customer-valued solutions with the best prices, products, and services to make Lowe's the first choice for home improvement; as well as becoming a sustainable business ("Lowe's annual report," 2009).
Robert A. Niblock has been the chairman and CEO of Lowe's Companies, Inc since January 2005 and he also served as Lowe's president from 2003 to 2006, and joined the Board of Directors when he was named chairman and CEO-elect in 2004. Larry D. Stone has been Lowe's president and chief operating officer since 2006 and is responsible for store operations, merchandising, marketing, logistics and distribution, merchandising, and store support. He is also responsible for Lowe's Canadian operations. Robert F. Hull, Jr. is Lowe's chief financial officer since March 2003. Hull is responsible for accounting, tax, treasury, investor relations, procurement and financial planning and analysis ("Lowe's annual report," 2009).
The Audit Committee is established by the Board of Directors as an independent and objective committee of the Board. Its purposes are to (a) assist the Board in monitoring the integrity of the Company's financial statements, the Company's legal and regulatory compliance, the Company's independent auditor's qualifications and independence, the performance of the Company's internal audit function and independent auditors, and the compliance by the company with its established internal controls, and (b) to prepare the Audit Committee report that is required by the rules of the SEC to be included in the Company's annual proxy statement.
The Compensation Committee is established by the Board of Directors of Lowe's Companies, Inc. as an independent and objective committee of the Board. The purpose of the Committee is to discharge the responsibilities of the Board relating to compensation for the Company's executives. The Committee has overall responsibility for approving and evaluating the executive compensation plans, policies and programs of the Company. The Committee is also responsible for producing an annual report on executive compensation for inclusion in the Company's proxy statement.
The purpose of the Governance Committee of the Board of Directors of Lowe's Companies, Inc. is to identify and recommend individuals to the Board for nomination as members of the Board and its committees consistent with the criteria approved by the Board, to develop and recommend to the Board the Corporate Governance Guidelines applicable to the Company and to oversee the evaluation of the Board and management of the Company ("Lowe's annual report," 2009).
Competiveness of the Industry:
The retail industry that specializes in home improvement has faced many challenges over the years but most recently due to the current recession caused by the failing housing market. Homes are no longer being built at the rate that it once was during the early 2000s so people are now opting to fix smaller projects at home themselves (DIY). The major competitors that Lowe's has in this industry are Home Depot and Builder's FirstSource. Home Depot and Lowe's are very similar in that they sell many of the same types of products (lumber, appliances, fixtures, etc) to the same types of customers (contractors, builders, do-it-yourselfers). Builder's FirstSource sells mainly to contractors and at a higher price tag and specialize in lumber. Higher scale customers (meaning the very wealthy) would buy from Builder's FirstSource because the merchandise is of a higher quality. Where both Home Depot and Lowe's sell appliances and all the just about anything you need for your home or home project, Builder's FirstSource doesn't sell appliances or any of the things that a regular customer would need for a small home project that they can find at Lowe's or Home Depot. Home Depot is currently number one in the Home Improvement market while Lowe's is number two. Builder's FirstSource is further down the rankings from Lowe's and Home Depot, but it was chosen because compared to the others (some are private companies like Menard and others like Sears aren't technically a home improvement store) it was the closest to Lowe's and Home Depot.
Lowe's lags behind Home Depot in the market, but does have an advantage over Home Depot as well as other competitors. Lowe's has it's own private label brands that brings loyalty among customers. This brings in repeat business which leads to a higher net income for Lowe's. Lowe's also sells proprietary brands such as Premier Living, Kobalt, and Portfolio which is through a contract for exclusive rights to these brands. Through these contracts, Lowe's can generate income that other retail industry competitors cannot. Lowe's and Home Depot comprise 18% of the $725 billion home improvement industry ("Lowe's annual report," 2009). The other 82% comes from large retailers such as Wal-Mart, Sears, and smaller hardware store chains such as Builders' First Source. Lowe's does differ in the typical warehouse environment of other retailers by having a more customer friendly shopping store. Smaller competitors have a slight advantage on Lowe's through tradition or convenience. Even the threat of boycott of large retailers by small towns can be an advantage at times.
Political/Legal/Regulatory:
Lowe's can continue to offer lower prices by monitoring the amount of inventory in stock. Many of Lowe's inventory products are imported from other countries. Restrictions or limitations on these imported products can have a drastic effect on how Lowe's offer competitive prices. Instability with another countries government, financial distress, or a failure to follow any laws or regulations may stop the supply of imports coming in to the United States. Other factors such as the global recession and the credit card crisis are already affecting operations of other Lowe's vendors which have lead to a reduction in sales and access to capital. The rise of unemployment to a 10% high has lead to a decrease in consumer confidence and spending ("Lowe's annual report," 2009). Big ticket items sales, which have been the highest source of revenue for Lowe's, have dropped sharply. Any changes in the law in regards to mortgage assistance or bank bailouts have a direct impact on Lowe's business.
The economy and environmental regulations will continue to impact Lowe's expansion strategy. Decisions made by the Obama administration will determine how many stores and the size of the stores Lowe's will create in 2010.
Ethical Environment:
Lowe's strive to have a "culture of caring" by participating in numerous community outreach programs. Lowe's has won the ENERGY STAR honors for seven consecutive years through their appliances which saves customers $190 million each year off their energy bills. Lowe's also sells WaterSense-labeled toilets and faucets which saves customers $750,000 each year on water bills. Lowe's was named E.P.A.'s top 10 retail Green Power Partners by moving 95% of its products using SmartWay participating carriers. Since 2005, Lowe's has saved more than $61 million gallons in diesel fuel and 682,000 tons of carbon. Lowe's has developed a program called Energy Awareness Delivers Savings (LEADS) in it's own stores which employees have reduced energy use by more than 300 million BTUS which will bring in a savings of $10 million. Responsible wood sourcing has been a commitment of Lowe's by continuing to support the Combat Illegal Logging Act of 2007 ("Lowe's annual report," 2009).
Lowe's is a partner of Habitat for Humanity and an underwriter for Habitat's Women Build Program which $19 million has been contributed towards. Lowe's also has given $20.1 million in contributions to the American Red Cross. Lowe's has developed a Charitable and Educational Foundation that has supported $15 million in grants throughout the United States and Canada.
Identification and Analysis of Key Ratios
Lowes
2009
2008
2007
2006
2005
Gross Profit Margin
34.86%
34.21%
34.58%
34.52%
34.23%
Operating Margin
5.98%
7.85%
9.75%
10.98%
10.79%
Net Profit Margin
3.78%
4.73%
5.82%
6.62%
6.41%
Return on Equity
9.35%
12.62%
17.45%
19.75%
19.32%
Return on Assets
5.40%
6.97%
9.10%
11.18%
11.23%
Inventory Turnover
5.72
5.88
6.34
6.57
6.45
Asset Turnover
1.43
1.48
1.56
1.69
1.75
Current Ratio
1.32
1.15
1.12
1.27
1.34
Quick Ratio
0.20
0.13
0.14
0.18
0.19
Debt Ratio
0.42
0.45
0.48
0.43
0.42
Home Depot
2009
2008
2007
2006
2005
Gross Profit Margin
33.87%
33.65%
33.61%
32.79%
33.52%
Operating Margin
7.26%
6.11%
9.36%
10.65%
11.49%
Net Profit Margin
3.96%
3.24%
5.44%
6.34%
7.16%
Return on Equity
13.72%
12.71%
24.81%
23.02%
21.70%
Return on Assets
6.51%
5.49%
9.92%
11.02%
13.12%
Inventory Turnover
6.50
6.68
6.59
7.08
7.15
Asset Turnover
1.62
1.73
1.75
1.74
1.83
Current Ratio
1.34
1.20
1.15
1.39
1.19
Quick Ratio
0.36
0.24
0.23
0.40
0.31
Debt Ratio
0.53
0.57
0.60
0.52
0.40
Builder's FirstSource
2009
2008
2007
2006
2005
Gross Profit Margin
21.01%
21.57%
24.51%
26.19%
25.35%
Operating Margin
-8.95%
-12.08%
-0.81%
6.24%
5.36%
Net Profit Margin
-8.39%
-12.74%
-1.48%
4.05%
2.08%
Return on Equity
-131.98%
-136.10%
-9.77%
35.34%
28.46%
Return on Assets
-14.23%
-26.77%
-3.64%
12.13%
6.72%
Inventory Turnover
14.12
15.01
16.76
18.36
15.65
Asset Turnover
1.56
1.98
2.46
2.99
3.23
Current Ratio
3.51
4.24
3.25
3.05
2.09
Quick Ratio
2.81
3.30
2.41
2.20
1.38
Debt Ratio
0.89
0.80
0.63
0.66
0.76
Lowe's increasing Gross Profit Margin of 34.86% shows that the firm is having more money left over from revenues after accounting for the cost of goods sold for the past three years in a row.
Lowe's decreasing Operating Margin of 5.98%) is showing that the portion of the company's revenue left over after paying for variable costs of production such as wages, raw materials, etc. is not healthy because it is earning less per dollar of sales. A healthy operating margin is required for a company to be able to pay for its fixed costs, such as interest on debt. Lowe's decreasing Net Profit Margin shows that the firm does not have better control over it costs which are similar to its competitors like Home Depot. Home Depot's Net Profit Margin of 3.96% shows how much of every dollar of sales the firm is actually keeping in its earnings. Home Depot's 3.96% is comparable to Lowe's Net Profit Margin of 3.78%. Lowe's decreasing Return on Equity of 9.35% shows how much the firm generates a profit for its shareholders. According to Investopedia.com, there are several variations on the formula that investors may use:
1. Investors wishing to see the return on common equity may modify the formula above by subtracting preferred dividends from net income and subtracting preferred equity from shareholders' equity, giving the following: return on common equity (ROCE) = net income - preferred dividends / common equity.
2. Return on equity may also be calculated by dividing net income by average shareholders' equity. Average shareholders' equity is calculated by adding the shareholders' equity at the beginning of a period to the shareholders' equity at period's end and dividing the result by two.
3. Investors may also calculate the change in ROE for a period by first using the shareholders' equity figure from the beginning of a period as a denominator to determine the beginning ROE. Then, the end-of-period shareholders' equity can be used as the denominator to determine the ending ROE. Calculating both beginning and ending ROEs allows an investor to determine the change in profitability over the period.
Lowe's increasing Return on Assets of 5.40% shows how profitable the firm is relative to its total assets. Since ROA can vary every year, it is best to always look at the previous years before making a determination. Lowe's decreasing Inventory Turnover of 5.72 shows how many times inventory has been sold and replaced over the year. Compared to the industry average of 4.2%, Lowe's may have high inventory levels which is unhealthy because it represents an investment. Lowe's decreasing Asset Turnover of 1.43 is about average compared to the industry of 1.6. This ratio determines the amount of Lowe's sales that are generated from each dollar of assets. Lowe's slightly increasing Current Ratio of 1.32 is higher than the industry average of 1.24. This ration gives an idea of Lowe's ability to pay back its short-term liabilities and assets. Lowe's higher Current Ratio which is over 1 show that the firm is more capable of paying its obligations. Lowe's increasing Quick Ratio of .20 shows the firm's ability to meet its short term obligations with its most liquid assets. Lowe's is slightly lower than the industry average of .30 which shows that it isn't in as good a position as its competitors, such as Home Depot which is at a .36, when it comes to short-term liquidity. Lowe's Debt Ratio of .42 indicates the proportion of debt the firm has relative to its assets. Lowe's Debt Ratio is less than 1 which indicates the Lowe's has more assets than debts.
Lowe's Stock History
Stock Price ($) P/E Per Share ($)
Year FY High FY Low FY Close High Low Earns. Div. Book Value
Jan 2009 28.49 15.76 18.27 19 11 1.49 0.34 12.27
Jan 2008 35.74 19.94 26.43 19 11 1.86 0.29 10.94
Jan 2007 34.83 26.15 33.71 18 13 1.99 0.18 10.68
Jan 2006 34.85 25.36 31.77 20 15 1.73 0.11 9.74
Jan 2005 30.27 22.95 28.50 22 17 1.36 0.08 7.84
Lowe's Market Data
Last Close (12-Feb-2010) $22.16
52-Week High $24.50
52-Week Low $13.00
60-Month Beta 1.0
Market Cap (mil.) $32,620.23
Shares Outstanding (mil.) 1,472.0
Dividend Rate 0.36
Current Ratio 1.15
Return on 9.3%
Return on Assets 5.2%
Competition and Industry
Valuation
Lowe's
Builder's FirstSource
Home Depot
Industry
Price/Sales Ratio
.69
.22
.90
.82
Price/Earnings Ratio
18.69
(2.65)
22.73
22.47
Price/Book Ration
1.68
1.70
3.08
2.55
Price/Cash Flow Ratio
7.87
(54.64)
11.63
10.26
The Price/Sales Ratio for Lowe's is low compared to the Industry average. Home Depot appears to be doing well in this ratio, but it doesn't take into account any expenses or debt this company may have. Lowe's low P/E suggests that investors are expecting lower growth earnings in the future compared to companies with a higher P/E such Home Depot. Lowe's lower P/B ratio may mean that the stock is undervalued. However, it could also mean that something is wrong with the company. As with most ratios, we are wary with this ratio since it varies by industry. Lowe's Price/Cash Flow Ratio is less than the industry average which tells us the market's expectations of Lowe's future financial health is not optimistic. Since this ratio deals with cash flow, the effects of depreciation and other non-cash factors have been removed.
HISORICAL 5 YEAR INDUSTRY AVERAGE
2009
2008
2007
2006
2005
Gross Profit Margin
33.78%
31.7
Pre-Tax Profit Margin
5.77%
Net Profit Margin
3.68%
3.6
Return on Equity
11.9%
20.7
Return on Assets
5.8%
10.0
Return on Invested Capital
8.2%
Price/Sales Ratio
0.82
Price/Earnings Ratio
22.47
Price/Book Ratio
2.55
Price/Cash Flow Ratio
10.26
Days of Sales Outstanding
3.18
Inventory Turnover
4.2
4.9
Days Cost of Goods Sold in Inventory
88
Asset Turnover
1.6
Net Receivables Turnover Flow
114.9
Effective Tax Rate
37.0%
Current Ratio
1.24
1.79
Quick Ratio
0.3
1.1
Leverage Ratio
2.00
Total Debt/Equity
0.41
.47
Interest Coverage
309.88
Revenue Per Share
37.58
Dividends Per Share
0.59
Cash Flow Per Share
2.99
Working Capital Per Share
1.62
Long-Term Debt Per Share
4.17
Book Value Per Share
12.05
Total Assets Per Share
24.13
Financial Data Sources
Lowe's companies, inc. (2010, April). Retrieved from http://0-premium.hoovers.com.oasis.lib.tamuk.edu/subscribe/co/factsheet.xhtml?ID=rfstfffjsskrct
("Lowe's companies, inc," 2010)
Summary of lowe's companies inc. (2009, September 1). Retrieved from http://biz.yahoo.com/e/090901/low10-q.html
("Summary of lowe's," 2009)
Lowe's annual report. (2009). Retrieved from http://www.lowes.com/AboutLowes/AnnualReports/annual_report_09/pdf/Lowes_2009AR_bookmarks.pdf
("Lowe's annual report," 2009)
Stock: lowe's companies (low). (2010, March). Retrieved from http://www.wikinvest.com/stock/Lowe%27s_Companies_(LOW)
("Stock: lowe's companies," 2010)
Hindo, B, & Byrnes, N. (2007, January 15). A Sharper edge at lowe's. Retrieved from http://www.businessweek.com/magazine/content/07_03/b4017006
(Hindo, & Byrnes, 2007)
Hudson, S. (2003, October 14). Success with hub and spoke distribution. Retrieved from http://scm.ncsu.edu/public/lessons/less031014.html
(Hudson, 2003)
Investorpedia. (2010, March 15). Retrieved from http://www.investopedia.com/terms/p/price-earningsratio.asp
("Investorpedia," 2010)
