Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Long Ideas

How Much Money is Lowe’s (NYSE: LOW) making?

America’s other home improvement store Lowe’s (NYSE: LOW) is one of the more intriguing value investments in retail these days.

In particular, Lowe’s delivered a 7.15% revenue growth during 3rd Quarter 2018. Such revenue growth is always good for a retailer, but during the Age of Amazon it is astounding.

In addition, Lowe’s made a lot of money from that revenue growth. For instance, Lowe’s generated a gross profit of $7.199 billion on 3rd Quarter revenues of $20.888 billion. Markedly, Lowe’s pulled an operating income of $2.163 billion and a net income of $1.520 billion out of those revenues.

These figures and a gross margin of 34.46% for 3rd Quarter demonstrate that Lowes is Amazon proof. The financial numbers prove that Lowe’s can thrive with Amazon (NASDAQ: AMZN) as a competitor.

Is Lowe’s (NYSE: LOW) Amazon Proof?

Like its direct competitor, Home Depot (NYSE: HD) Lowe’s (NYSE: LOW) is Amazon proof because it operates in a business with a high moat: home improvement and building supplies.

Amazon would have a hard time shipping building supplies through UPS (NYSE: UPS) or FedEx (NYSE: FDX). Conversely, the 20,000 Mercedes-Benz delivery vans, Amazon plans to buy from Daimler AG (OTC: DDAIF) might allow Amazon to compete in home improvement.

Amazon will ship smaller items like tools, paint, and roof sealer through such a delivery system. I recently ordered a five gallon can of roof sealer from Home Depot that UPS delivered. Moreover, three sets of Venetian blinds I ordered from Home Depot also came by UPS.

Therefore, I conclude that Amazon can easily compete with Lowe’s in some highly lucrative areas. Particularly, Amazon will have an easy time of selling certain kinds of building and home improvement supplies to people like me.

I do not live within easy driving distance of either Home Depot or Lowe’s. Under those circumstances I order a lot of stuff online.

The 20,000 vans Amazon wants to put on the road should scare both Lowe’s and Home Depot. Those vehicles will enable Amazon to deliver merchandise directly to homeowners, landlords, and small contractors. Such people are Lowe’s core customers.

 Lowe’s (NYSE: LOW) vs. Amazon

Lowes (NYSE: LOW) is in an excellent position to fend off Amazon because of its cash flow.

For instance, Lowe’s generated an operating cash flow of $2.358 billion during 3rd Quarter 2018. A free cash flow of $2.064 billion complemented that figure for the same period.

Unfortunately, Lowe’s is having a hard keeping that cash around. Lowe’s reported cash and equivalents of $2.251 billion and short-term investments of $391 million on 3 August 2018. Therefore, Lowe’s had a bankroll of $2.642 billion.

That puts Lowe’s at a terrible disadvantage because Amazon reported $19.823 billion in cash and equivalents on 30 June 2018. In addition, Stockrow reports Amazon had $7.227 billion in short-term investments on the same day.

Correspondingly Amazon has far more money to spend on delivery than Lowe’s. Lowe’s could have no way to fend an aggressive move into Home Improvement by Amazon.

 Lowe’s (NYSE: LOW) is still a Great Dividend Stock

All the cash ensures that Lowe’s (NYSE: LOW)will maintain its status as a great dividend stock for a long time.

Markedly, reports Lowe’s delivered 55 years of straight dividend growth. That growth rewarded Lowe’s shareholders with a dividend yield of 1.66%, an annualized payout of $1.92 and a payout ratio of 37% on 28 September 2018.

Lowe’s scheduled its next dividend of 48¢ a share for 7 November 2018. Best of Lowe’s dividend grew by 7¢ in 2017 and 2018. Specifically, Lowe’s paid a 35¢ dividend in 2016 that rose to 41¢ in 2017 and 48¢ in 2018.

Obviously, Amazon threatens the dividend because Lowe’s might have to divert money to fight the Everything Store. In particular, fleets of delivery trucks and vans cost money. It could force Lowe’s into spending more on delivery to counter Amazon.

Parisa Sadrzadeh, left, a senior manager of logistics for, demonstrates a package delivery for journalists, Wednesday, June 27, 2018, at a media event in Seattle to announce a new program that lets entrepreneurs around the country launch businesses that deliver Amazon packages. It’s another way for Amazon to gain greater control over how its packages are delivered. (AP Photo/Ted S. Warren)

How Technology will Help Lowe’s (NYSE: LOW) fight Amazon

On the positive side, there are many ways that technology will help Lowe’s (NYSE: LOW) fight Amazon.

Autonomous vehicles, for example, could reduce expense by limiting the number of drivers Lowe’s needs. Robots, for instance, could cut costs by stocking shelves and processing lumber or mixing paint on site.

Cashier-less checkout, in particular, could cut costs by reducing the need for staff. Ironically, Amazon is testing cashier-less automated checkout at its Go stores in Seattle, Los Angeles, and Chicago.

In reality, cashier-less checkout is hardly a new concept. In particular, grocers like Walmart (NYSE: WMT), Kroger (NYSE: KR), and Safeway have been deploying automated checkout for years.

Cashier-less stores that used coin-operated dispensers were proposed as early as the 1920s. Incredibly, future President Franklin D. Roosevelt (D-New York); now remembered as a champion of labor, was a major investor in one early cashier-less store concept.[1]

Technology threatens Lowe’s dividend because new tech costs a lot of money. I predict it will force Lowe’s to borrow heavily and spend heavily to keep up with Amazon.

On the other hand, Lowe’s is still a good investment because of its high dividend and stock price. Therefore, Lowe’s is still the best value in home improvement despite the looming threat of Amazon.




[1] See FDR: the Beckoning of Destiny by Kenneth S. Davis for details of the future president’s flirtation of retail automation.