The company cites negative factors such as the mortgage delinquency and foreclosure rates, and the substantial number of homes with negative equity. And since the 10-K was released we have that new troublesome trend on the horizon: rising mortgage rates. In my view, since mortgage rates are still at historically low levels, the uptick we’ve seen recently may not be that much of a factor on home sales. Turnover of homes is important because homeowners usually make improvements and upgrades just before putting the home on the market so it is more attractive to the buyer. And when the new owners move in, they usually want to make some changes and upgrades of their own.
The improvement in the housing market must be sustainable in order for Lowe’s to reach its revenue and profit objectives. The Home Depot, Inc. (NYSE:HD)’s 10-K contains much the same economic concerns. That company also strives to get customers to bond with them by providing interactive designing and planning tools accessed from the customer’s home computer.
A differentiating factor among these companies is who does the best job finding and training knowledgeable sales associates, and as Home Depot acknowledges in its own risk factors, one is being able to attract these employees and still control labor costs.
“We may not be able to achieve the objectives of the strategic initiatives we have underway if our organization is unable to make the transformational changes we are undertaking in our business model.”
To convert that long sentence out of corporate-speak: management is worried that it will be difficult to achieve the goal of being the customer’s partner throughout the process of completing a project. It requires sales associates with deep product knowledge, customers using the project planning tools Lowe’s has created, and — here’s the really difficult part — a small army of independent contractors including installers and repair techs performing their jobs with great competence. This new model could work in helping the company get a bigger share of the customer’s project expenditures. Or it could lead to customer frustration and dissatisfaction.
First quarter update
Lowe’s reported that comparable store sales decreased 0.7% in the first quarter compared to the same quarter of 2012, partially due to bad weather impacting sales of outdoor products. The company’s outlook for the full year is that comparable store sales will be up a healthy 3.5%. Competitor Home Depot reported a solid first quarter increase in comparable store sales of 4.3%. CEO Frank Blake cited the housing recovery as sparking a “stronger-than-expected start to the year.”
It’s very simple
Lowe’s definitely has all the tools, so to speak, to keep growing. For investors, the question is whether you believe interest rates will remain low and increase slowly, if at all. And we have to avoid the horror show “Housing Bubble: The Sequel” in order for home improvement stores to prosper.
Brian Hill has no position in any stocks mentioned. The Motley Fool recommends Home Depot and Lowe’s.
The article The Lowdown on the Risks Facing Lowe’s originally appeared on Fool.com and is written by Brian Hill.
Brian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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