Over the past one, three, five, and 10-year periods, Lowe’s (LOW -1.85%) stock has outperformed larger rival Home Depot. While the latter possesses better margins and return on invested capital, the former has still managed to stand apart as the better investment.
Much can be credited to Lowe’s increasing focus on serving professionals like contractors, electricians, and plumbers. This is a huge end market that can help the company continue its hot streak, as well as close the gap with Home Depot when it comes to profitability metrics.
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Professionals are invaluable to the business
Professionals currently represent 25% of Lowe’s total revenue, which is far less than Home Depot’s nearly 50%. The remainder of its business comes from do-it-yourself (DIY) customers, and there is a lot of catching up for Lowe’s to do.
Growing the Pro business is crucial to its success, because these customers spend more and visit stores much more frequently. They view Lowe’s as a mission-critical supply partner to help them get the right tools and equipment in a timely fashion to finish their projects. This means they’re sticky and less likely to switch to a competitor once the relationship with Lowe’s has been established.
The result is better overall financial performance on a per-store level. And in the brick-and-mortar retail business, generating more volume per location is the name of the game. Lowe’s fiscal 2021 gross margin of 33.3%, operating margin of 12.6%, and return on invested capital of 35.3% are likely to rise in the years ahead as more revenue comes from the Pro segment. And its sales per square foot of $463, a figure that has climbed at a solid clip in recent years, can continue its march higher.
Professionals have strong momentum
Lowe’s reports its fiscal 2022 first-quarter results on May 18, and I expect another quarter of strong momentum for the professional segment. Pro customer sales growth of 23% in the fourth quarter far outpaced DIY gains. And in that same period, comparable sales for transactions greater than $500 were up 15.6% year over year, much higher than smaller transaction sizes — yet another reminder that Pros generally have higher ticket sizes than DIY customers.
“We continue to expect Pro to outpace DIY in 2022,” CFO Dave Denton mentioned on the latest earnings call. Management also highlighted that business for Pros is “more robust than they’ve ever seen it.”
Lowe’s has introduced new initiatives to lure more professional customers as well. A revamped Pros website was launched in 2018, and it was recently moved to the cloud to provide better functionality. Features like a new loyalty and credit program, improved product availability, and intuitive store layouts help to make life easier for Pros while at the same time driving repeat purchases.
On the macroeconomic front, there are broad trends that support ongoing success for Lowe’s Pro business. Even with the recent spike following the Federal Reserve’s interest rate hike in March, mortgage rates are still at historical lows. Couple this with a low domestic housing supply, and the ingredients for a continuation of the robust housing market are present.
Higher home prices are a boon for Lowe’s as the wealth effect encourages consumers to take on renovation projects. And with the increase in vaccination rates across the country as the worst of pandemic is likely behind us, people are more comfortable letting contractors into their homes to take on big projects. The popularity of remote work provides another tailwind for upgrading living spaces.
Management estimates the market opportunity for professionals is $450 billion. The 25% of Lowe’s fiscal 2021 sales attributable to Pros amounts to $24 billion, so there is still lots of potential to take market share going forward.
As things stand today, there is no reason to believe the remarkable success Lowe’s has achieved with professional customers won’t continue going forward. It’s a key growth driver that is exhibiting serious momentum, and it should fuel the business — and the stock — in the years ahead.