The retail apocalypse has arrived in the world of home improvement. Lowe’s (NYSE: LOW) is closing 99 Orchard Supply Hardware stores and killing 4,000 jobs.
The good news is that Orchard Supply is not Lowe’s core business. Orchard Supply operates neighborhood hardware stores in California, Oregon, and Florida. Closing sales reportedly began August 23, and all Orchard Supply locations will shut down by the end of 2018, USA Today revealed.
Orchard Supply is dying so Lowe’s can concentrate on its core business of big-box home improvement centers, Business Insider reported. Orchard Supply apparently could not compete with Lowe’s and Home Depot’s (NYSE: HD) big box operations, Amazon (NASDAQ: AMZN), and Walmart (NYSE: WMT).
Did Income Inequality Kill Orchard Supply Hardware?
Disturbingly, Orchard Supply Hardware is the latest in a long line of middle-class retailers to die. Growing income inequality and other economic changes are slowing killing off the market for many middle class retail brands.
High housing costs and income inequality contributed to Orchard Supply Hardware’s death. Not coincidentally, San Jose is Orchard Supply’s home town.
The number of homeowners in the Bay Area shrank by 5% in the past decade, The San Jose Mercury News reported. Having fewer homeowners will shrink Orchard Supply Hardware’s customer base.
Frighteningly, those new renters are less likely to become homeowners. The Mercury News reported that 45.1% of San Jose area renters were “rent burdened.”
A rent-burdened family spends over 30% of its income on rent. Therefore, 45.1% of renters are unlikely to buy a home; and become Lowe’s, customers soon.
The bad news for Lowe’s is this trend will spread nationwide because of rising home prices. CNBC reported that the average home price in the United States was $269,000 in July 2018, up 4% from July 2017.
Is Lowe’s Making Money?
America’s home improvement crisis is hurting the home-improvement business. Logically, this will cause values investors to ask is Lowe’s making money?
Lowe’s is still making a lot of money. Lowe’s reported a gross profit of $6.0212 billion, an operating income of $1.465 billion, and a net income of $988 million for 2nd Quarter 2018. Stockrow data showed that Lowe’s generated an operating cash flow of $3.429 billion and a free cash flow of $3.210 billion for 2nd Quarter 2018.
Importantly, Lowe’s business is growing revenues increased by 2.97% in 2nd Quarter 2018. Disturbingly, Lowe’s revenues fell for the first time in quite a while in 1st Quarter 2018. Revenues dropped by 1.8% in 1st Quarter 2018, after growing by 6.55% in 4th Quarter 2017.
Revenues are still great at Lowes, the company made $17.360 billion in revenues during 2nd Quarter. Revenues increased by $1.866 billion during 2nd Quarter 2018, even with a lousy subsidiary like Orchard Supply Hardware.
Lowe’s has problems despite the great revenues. The company had just $1.565 billion in cash and equivalents and $1.77 billion in cash and short-term investments on May 4, 2018.
Orchard Supply Death proves Lowe’s is a good company
Orchard Supply Hardware’s demise proves that Lowe’s is a good company and a value investment.
Lowe’s management is shutting an ailing subsidiary down rather than shoveling money into it. Importantly, that gives management more money to invest in the lucrative home-improvement center business.
An added benefit is that Lowe’s can sell the Orchard Supply Hardware locations to growing retailers. Brands like Aldi, Amazon Go, Nordstrom Local, and possibly Kroger (NYSE: KR) will seek new locations in California, Florida, and Oregon. Lowe’s can sell the Orchard locations or leases to those companies.
Lowe’s will even profit from the transition to renting because all those landlords will need supplies to maintain and remodel their units. Those supplies can come from Lowe’s which specializes in selling to the small contractors that work on rental units.
A huge advantage Lowe’s has is that it specializes in delivery of building supplies. Increasingly, it is cheaper for a contractor or landlord to have the materials he needs delivered to his jobsite. Therefore, Lowe’s can serve larger areas with fewer locations and less employees.
Lowe’s will profit from the Great Baby Boomer Sell Off
Interestingly, the changing economy benefits Lowe’s by speeding up the transition to rentals. A long-term opportunity for Lowe’s is the huge number of homes owned by Baby Boomers (persons between 53 and 72 years of age).
Many Boomers will sell their homes soon after retirement because Social Security will be their only income. Moreover, the average Social Security benefit for a person over age 65 is $1,262 a month.
That provides an income of $15,144 a year, below the $16,460 poverty line for a couple. Most Americans cannot support a home on $15,144 a year.
Therefore, Boomers will dump vast numbers of home on the market in the next decade. The Bipartisan Policy Center predicts that Boomers and their heirs will sell 26 million homes between 2018 and 2030.
Lowe’s will profit because most of those homes will require repair and remodeling. The supplies for that work will come from Lowe’s or Home Depot. Many of the Boomer homes need remodeling to become sellable.
Syndicates of investors that buy homes and rent them out, will be a growing business soon, Chris Nelson told KGUN TV. Nelson is a professor of urban planning and real estate at the University of Arizona. Those syndicates will be major customers for Lowe’s.
Lowe’s Future is Bright
Therefore, Lowe’s future is bright despite falling home ownership. Lowe’s great dividend will make that future even brighter for investors.
Lowe’s has scheduled a 48¢ dividend for October 23, 2018. That 48¢ marks a seven cent increase over the 41¢ Lowe’s paid out on 25 April 2018.
Lowe’s is one of the best dividend stocks around. Incredibly, it has delivered 55 years of dividend growth to share owners. Lowe’s shareholders enjoyed a 1.8% dividend yield, an annualized payout of $1.92, and a payout ratio of 36.9% on 24 August 2018.
The dividend makes Lowe’s a great income stock. The modest price of $108.01 made Lowe’s (NYSE: LOW) a good value investment on 30 August 2018. The far-sighted management and upcoming upheavals in the real estate market offer lots of growth potential at Lowe’s.
If you buy one retail stock this year, Lowe’s would be a good choice. This company is cheap, it pays a nice dividend, its revenues are growing, and a far-sighted management team has positioned the home-improvement giant for a lot of growth.