Lowe's (LOW +0.07%) has been struggling for years to close the performance gap with industry leader Home Depot (HD +1.50%). But that dynamic is changing.
The home improvement giant just finished out a year that paired sharp sales growth with improving profitability. And CEO Marvin Ellison, who used to serve as a top executive at Home Depot, is predicting further market share gains ahead.
Let's look at what Ellison and his team had to say about the fourth quarter and the early outlook for 2021.
Image source: Getty Images.
Getting the job done
"Great execution, combined with our compelling product offering of well-known national brands, balanced with high-value private brands, ensured that we were well positioned to meet the continued elevated demand for home-related projects during the quarter," Executive VP Bill Boltz said.
The biggest challenge was keeping shelves stocked through unrelenting demand pressures. Lowe's succeeded, notching a third straight quarter of faster growth than Home Depot. For the year, sales rose 24% compared to its peer's 20% spike.
Comparable-stores sales growth in Q4 was 29% compared to Home Depot's 25%. Management credited its focus in areas like home installation services and a refreshed product assortment. "We're gaining traction with our ... strategy," Ellison stated.
Gaining efficiency
"Operating margin improved in the quarter as our strong focus on cost control and productivity continued to pay dividends," CFO David Denton commented.
There was no shortage of cost pressures this quarter, with expenses rising on labor and COVID-19 protective measures. Lowe's also had to deal with higher commodity costs on lumber.
But the chain still managed to boost margins for the quarter and for the full year. Operating income landed at $9.6 billion, or 11% of sales, compared to $6.3 billion, or 9% of sales, a year ago.
LOW Operating Margin (TTM) data by YCharts.
Home Depot's comparable metric is still significantly higher at 14%, but the trends suggest Lowe's has a shot at overtaking its rival in the next few years. "We're really focused on margin expansion as we cycle into this year," Denton said.
Stepping back after a record year
"While it's still very early in the year, we are seeing market trends essentially in line with the robust market scenario. This scenario assumes the relevant home improvement market will experience a modest contraction this year," Denton stated.
The uncertainty around the pandemic has management offering a wider range of potential sales results in 2021. There are three broad possible scenarios, executives said, ranging from weak to robust demand. So far, the robust trends are holding, which would likely put sales at around $86 billion for the year if they continue.
Sure, that would mark a decline from this past year's $90 billion revenue footprint. But a pullback was inevitable after growing annual sales by over 20%.
In the meantime, Lowe's is expecting to win market share in the shrinking industry while pushing operating margin up to as much as 12% of sales this year. After spending 2018 and 2019 shoring up its retailing fundamentals, the chain shifted to an offensive strategy this past year. Lowe's is aiming to build on that momentum with a more aggressive posture in 2021. "We are confident that these initiatives will allow us to drive sustainable market share growth as we deliver a total home solution for our pro and [do-it-yourself] customers," Ellison explained.
