$LOW Lowe's Q4 Earnings: Weak but management is positioned to take share in a weak PRO and DIY home improvement spending environment

By: Jeffrey Cohen, US Advanced Computing Infrastructure, Inc.
www.chicagoquantum.com
​February 27, 2024

We read the Lowe's earnings documents and listened to the Lowe's earnings call live this morning.  Here are our top takeaways:

• January comps down 7.4% due to winter weather.
• Profits strong as gross margins held, and help from SG&A, CAPX and taxes YoY.
• Significant weakness in appliances and large DIY projects
• PRO strength in pricing and transaction volumes
• Q4 strength in building products including roofing and drywall.

They are focused on: WINNING SPRING

Comparable same sales weakness accelerated from November through January:
-4.8%  Nov, 2023
-6.6%. Dec 2023
-7.4%  Jan, 2024


For 2023, tools had comps above product average, but not in Q4 2023.


The larger the ticket (100, 100-500, 500+) the worst the comp.
-4.5%   <$100
-7.2%   [100,500]
-8.8%   > $500


1. Sales are down almost $4B, but ~$2.5B came from the Canadian divestiture, and one less selling week vs. 2023
2. Comps down 6.2% based on 6.1% fewer transactions and 0.1% smaller transaction size.
3. Customer satisfaction scores up 200 basis points (2%) and in some cases 25%
4. Perpetual Productivity Improvement PPI looks to repeat the $400M in savings next wear. They are focused on improving sales productivity in the store, not in building new stores.
5. Lowe's stated that January weakness was weather related, and demand related, but mostly weather related.
6. The larger the transaction, the worse the comps. DIY is focusing on smaller, non-discretionary projects (think repairs). They are preferring to spend on services and experiences.
7. Housing sales are down massively, and likely to continue until mortgage rates decline again. Until then, may not see as many large DIY and PRO projects. Disposable income, housing sales, housing price appreciation, and the age of housing drives DIY and PRO housing improvement project spend.
8. No idea when home improvement spend will increase, we are not yet at a bottom and we are not calling a recovery, a trough, or anything. Maybe H1 2024 is the trough, and H2 2024 is the recovery? Lowe's is positioned to thrive under any demand scenario. We think, maybe H2 2024 will see a turn-around, but we are not betting on it.
9. Their rural product lineup into clothes, pets and automotive is doing great, and as they learn more they may roll it out into some non-rural locations.
10. The investments in omni-channel, with better delivery options, and text-based customer service, and appliance full-service, and logistics, supply chain and fulfillment innovation, and inventory stocking, will see them continue to gain share and grow profitability.

At the end of the day, Lowe's returned more cash to shareholders through dividends and share buy-backs than they generated. They have a 2.3x debt to EBITDA ratio, and likely grew their debt leverage to return all that cash. Interesting choice...they are not seeing nor planning for a recession by not building a cash hoard (IMO, implication we take away).

They celebrated the return of Klein tools into their stores for electricians. Did well in hand tools and stackable tool storage. Record sales.

What does this mean for ToughBuilt Industries $TBLT?
- Tools & Accessories is a good area, with above average YoY comparables. However, this sector is waiting for either a PRO recovery (not yet, Lowe's PRO surveys suggest stability), or it is looking for an increase in larger DIY project spend, especially in discretionary projects. Until the secular housing market recovery, this is a fight for tools share (in a declining market) based on innovation, value, consumer choice, product quality (and safety) and aggressive, global product distribution.

- We are interested to see how Lowe's restocks their tools and accessories for Spring, starting in March 2024. We would like to see if they grow their display for Stack Tech TM mobile storage solutions including the new product SKUs introduced in Q4 and Q1 2024.  We will be looking for restocks on saw horses, modular work tables, mitre saw tables, levels, knives, tape measures, screw drivers, hammers, hand saws, wrenches, pliers, clamps, belts, tool pouches, knee pads, rolling tool bags, tool bags, tool totes, other soft goods and electrical products.
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- If we see a large influx of ToughBuilt products for the Spring and Summer selling season, it will support management's narrative of a positive CFFO in Q3 2024. Fingers crossed for a strong ToughBuilt 2024.