Calendar year 2020 has been a phenomenal year for Lowe’s (NYSE: LOW). The business has thrived by serving people stuck in their homes indefinitely. All of a sudden, people had to do more things at home than they used to do elsewhere; think about exercise, distance learning and distance work.
All of the changes required adapting your home with accessories and additions that Lowe’s provided exceptionally well. Customer demand has remained high even as economies reopen, and one of the new challenges for Lowe’s is meeting that demand. It gets harder and harder as supply chain disruptions and rising costs hit businesses around the world. That’s why operating profit margin is something investors will focus on when Lowe’s releases its third quarter results on November 17.
Improving Productivity Boosts Lowe’s Profits
Interestingly, for fiscal 2021, Lowe’s management told investors that they would run their business with an operating profit margin of 12.2%. The company is historically behind its biggest competitor, Home deposit (NYSE: HD), in this metric. Therefore, the management has recently placed emphasis on the rapprochement with its rival.
So far, in the first two quarters of 2021, Lowe’s is exceeding its target. Operating income as a percentage of sales is 14.34%, a total of 210 basis points ahead of plan. Management attributed the outperformance to the focus on improving productivity. One of those improvements the company has implemented is digital price tags throughout the store. This way associates no longer have to browse the store to change prices. This feature is increasingly paying dividends, as volatile fluctuations in the prices of lumber and other commodities lead to frequent price adjustments. The cost of employee time is also increasing, as rising wages hit businesses heavily.
Supply chain disruptions and commodity price inflation have received a lot of media coverage in recent months. Management spoke about dealing with the difficulties during their second quarter conference call:
Supply chain costs also weighed on the margin by 35 basis points as we absorbed high distribution costs and continued to expand our omnichannel capabilities. Our supply chain team continues to leverage our scale and carrier relationships to minimize the impact of those distribution costs encountered in the retail industry.
Indeed, with greater purchasing power, Lowe’s can have influence in negotiations with suppliers. A trader can make more money by selling to Lowe’s at lower prices because Lowe’s buys large quantities. As such, a supplier is not likely to risk losing Lowe’s as a customer and is more willing to absorb higher costs.
Will a good performance in Q3 boost Lowe’s stock?
Wall Street analysts expect Lowe’s to report third-quarter revenue of $ 21.7 billion and earnings per share (EPS) of $ 2.30. The EPS estimate represents a 16% increase over the figure for the same quarter last year. It appears that Wall Street expects Lowe’s productivity improvements to have a significant impact on the bottom line.
Lowe’s stock is already up 46% year-to-date, so it’s unclear whether the continued improvement in operating profit margin can boost it. But if anything can drive an already hot stock even higher, it’s increasing profits.
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