Market Mad House

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

Long Ideas

Is the Retail Apocalypse Coming to Lowe’s?

The retail apocalypse is coming to home improvement stores, Lowe’s (NYSE: LOW) will terminate thousands of workers.

The Wall Street Journal claims Lowe’s will replace thousands of employees who assemble items like grills with thirty contractors, USA Today reports. However, there is no evidence Lowe’s is planning layoffs of in-store workers.

Instead, the company is eliminating peripheral workers who may add little to its core business. To explain, Lowe’s main business is selling building supplies, tools, home furnishings, and appliances to contractors and home and building owners.

Lawnmowers and grills are expensive consumer goods, Lowe’s sells as a sideline. Thus, Lowe’s could change its business model and moving away from consumer goods.

Lowe’s is Changing its Business Model

Lowe’s is drastically changing its business model. For instance, the company is switching suppliers and automating stores.

Notably, Lowe’s is testing the use of robots to check inventory, a NVIDIA (NASDAQ: NVDA) video reveals. In addition, USA Today reports Lowe’s CEO Marvin Ellison wants constant inventory checks, like Walmart (NYSE: WMT) is pioneering at its Intelligent Retail Lab on Long Island.

Other changes at Lowe’s include the closing of the Orchard Supply Hardware Chain and 51 Lowe’s locations. I think Ellison is trying to make Lowe’s leaner and meaner so it can survive the retail apocalypse. In particular, Ellison is trying to cut fat, so will Lowe’s will be more profitable when Amazon (NASDAQ: AMZN) comes for its customers.

Why is Lowe’s Changing its Business Model?

Currently, Lowe’s faces three huge; but poorly understood, threats to its business. 

First, is the aging and dying off of Lowe’s main group of customers US and Canadian Baby Boomers. To explain, the Boomers are Americans aged 54-74 who were born in the Post World War II Baby Boom. Incendar estimates 4,676 US Boomers die each day.

The Boomer die off could be catastrophic for Lowe’s; because its target customer is a 50 to 70-year-old white person who owns a suburban home. Significantly, I estimate Boomers are dying off at a rate of 1.705 million a year.

Lowe’s Customers Could Soon have no Money

Second, Boomers will soon have less money to spend at Lowe’s because they will soon retire. This could hurt Lowe’s because Bloomberg estimates 52% of Americans approaching retirement age (Boomers) have no retirement savings.

Therefore, over half of Lowe’s prime customers could soon have nothing to live on but Social Security. However, the Social Security Administration estimates the average Social Security payment for a person over 65 was $1,274 a month in June 2019.

Under those circumstances, more seniors will try to sell their homes for extra cash than working on them. Moreover, few of those seniors will have extra cash to spend on grills or lawnmowers from Lowe’s. Thus, getting out of those businesses now could be a smart move for Lowe’s.

America’s Home Ownership rate is falling

Third, there is evidence Millennials (those ages 24 to 39) are less likely to buy the houses Boomers leave behind or sell.

The home ownership rate for Millennials in 2015 was 32.2% compared to 75% for Baby Boomers, The Urban Institute calculates. Thus, under one-third of Millennials owned homes in 2015. That’s bad for Lowe’s because Pew projects Millennials to America’s largest generation with 73 million members in 2019.

In fact, the US Census Bureau estimates America’s home ownership fell slightly over the past year. The Bureau estimates the home-ownership rate fell from 64.3% in 2nd Quarter 2018 to 64.2% a year later. A tiny drop but it could be a trend.

Additionally, new home sales fell by 2% between June 2018 and June 2019, The New York Times estimates. Home sales fell despite low mortgage interest rates which the Federal Reserve uses to encourage home buying. Notably, the Federal Reserve is lowering interest rates in an attempt to increase home sales.

Given these realities, Lowes could soon have fewer customers and its remaining customers could have less money to spend. The affluent suburban homeowner who was the backbone of Lowe’s business could soon be history.

How Lowe’s is Adapting to a New America

I think Ellison understands the demographic changes and is adapting Lowe’s business model to survive them.

For instance, Lowe’s is moving away from consumer sales by closing Orchard and reducing its lawn mower and grill assembly business. Moreover, Lowe’s is reducing its dependence on human-based customer service by automating stores.

A likely scenario is that Ellison is requisitioning Lowe’s to concentrate on sales to contractors and landlords. To explain, Americans are less likely to own a home but they will still need a place to play. Consequently, there will be more rentals and landlords in America.

Accordingly, investors are buying up likely rental homes in markets like Atlanta, The New York Times notes. Those investors will need to remodel many of those homes which could help Lowe’s. The landlords or their contractors will need supplies and Lowe’s can provide those supplies.

Lowe’s New Retail Strategy

Automated stores, for example, could move building supplies and tools to contractors faster. Such automated stores could serve as fulfillment centers for  fleets of delivery trucks serving contractors and landlords. Under that scenario, Lowe’s could still serve retail customers while scaling its contractor business to meet demand.

Serving contractors is a smart strategy because there is less competition in that segment. When it sells to consumers, Lowe’s must compete directly with both Walmart and Amazon (NASDAQ: AMZN). However, it only competes with Home Depot (NYSE: HD), hardware stores, and smaller local companies in the contract market.

Finally, Lowe’s can reduce operating costs by concentrating on the contractor marketing. Selling directly to contractors who order online or over the phone could enable Lowe’s to cut its store staffs. In addition, Lowe’s can reduce its inventory and related expenses.

Is Lowe’s Making Money?

Such radical shifts in strategy will have many investors wondering if Lowe’s is making money.

Interestingly, Lowe’s is making money right now but is coming off a quarter of losses. Specifically, Lowe’s reported an operating income of $1.417 billion and a net income of $1.046 billion on 3 May 2019. That’s a big improvement over the operating loss of -$568 million and the net loss of -$824 reported on 1 February 2019.

Plus Lowe’s reported revenues of $17.41 billion that grew at a rate of 2.19% on May 3, 2019. In addition, Lowes reported a gross profit of $5.581 billion on 3 May 2019 up from $4.037 billion on 1 February 2019.

Lowe’s is Generating Less Cash

Lowe’s is making more money and its revenues are growing. I think these numbers justify Ellison’s shift in strategy. The company needs that strategy, because Lowe’s is generating less cash.

Lowe’s is generating less cash in the form of a $2.137 billion operating cash flow and a $1.956 billion operating cash flow on 3 May 2019. However, those numbers are down from $3.429 billion and $3.210 billion on 4 May 2018.

However, Lowe’s is keeping more of that cash. The company had $2.973 billion in cash and equivalents on 3 May 2019. Moreover, Lowe’s had $190 million in short-term investments on the same day.

Thus Lowe’s had $3.163 billion in cash and short-term investments up from $1.77 billion in May 2018. Ellison’s strategy is bringing in more cash which Lowe’s will need to fight Amazon.

Is Lowe’s a Value Investment?

I think Lowe’s is a good company because its management will take risks and make changes before problems develop.

Instead, of waiting to see if home ownership and demand for certain products falls. Ellison is re-positioning Lowe’s bossiness now to service those segments of the market likely to grow.

Consequently, I consider Lowe’s (NYSE: LOW) a value investment at the $96.81 it traded at on 5 August 2019. Meanwhile, Lowe’s is also a good dividend stock.

Lowe’s is a good Dividend Stock

Lowe’s will pay a dividend of 55₵ on 7 August 2019. That dividend grew by 7₵ from the 48₵ Lowe’s paid on 8 May 2019. Moreover, this is the second year Lowe’s dividend grew by 7₵. Lowe’s paid a 41₵ dividend in 2017.

Amazingly, credits Lowe’s with 56 years of dividend growth. Each Lowe’s share offered a dividend yield of 2.27%, an annualized payout of $2.20 and a payout ratio of 42.4% on August 5, 2019.

I advise those looking for a good dividend stock that could survive the retail apocalypse and America’s changing patterns of home ownership to investigate Lowe’s. This home improvement giant keeps making money and paying nice dividends in a dramatically changing market.