Lowe’s Stock Is Anything But Low as Store Closings Highlight Risks

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As it pierces through its previous high-water mark set in April, Lowe’s Companies (NYSE:LOW) stock seems to be demonstrating the resilience of some (though certainly not all) brick-and-mortar retailers in the face of the disruptive Amazon (NASDAQ:AMZN) threat.

Lowe's Stock Is Anything But Low as Store Closings Highlight Risks

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With this encouraging price action comes a caveat, though, as recent store closings may be a cause for concern among long-term LOW stock investors. Is this concern enough to tip the scales in favor of the bear thesis for Lowe’s stock — or to put it another way, is Lowe’s in need of some “home improvement” itself?

LOW Stock Goes Up, Even as Stores Are Shut Down

Since CEO Marvin Ellison took over in July of 2018, the Lowe’s stock price has been on a roller-coaster ride but the trajectory has been generally and gradually to the upside. Strong third-quarter results cemented LOW stock — and Ellison’s reputation — as solid bets as the company shakes off its reputation as second fiddle to home-improvement giant Home Depot (NYSE:HD).

With Lowe’s third-quarter 2019 earnings coming in at $1.41 per share and handily beating the analyst consensus estimate of $1.35 per share, Wall Street had every reason to lean bullish. And indeed they did: Wells Fargo’s Zachary Fadem increased his price target to $135 from $130 and maintained a rating of “outperform”; Raymond James’ Matthew McClintock similarly maintained a “market perform” rating (you’d think these analysts would have standardized the ratings verbiage by now, but I digress …) while increasing his EPS estimate to $6.57 from $6.50; and Goldman Sachs’ Kate McShane raised her price objective on LOW stock to $135 from $123 while maintaining a “buy” rating.

McShane was perhaps the most effusive among them, emphasizing that the Q3 “results represented a positive step in rebuilding investor confidence around [Lowe’s] execution capabilities and transformation strategy” and opining that “LOW’s stock price/valuation hasn’t outpaced its progress.”

It may be too early to credit the company’s still new-ish CEO with all of this, especially as the Federal Reserve’s three consecutive interest-rate cuts have boosted the housing market and — let’s not kid ourselves — the stock market generally. Moreover, the earnings beat may have been the headline, but don’t skip the subheading: Lowe’s is closing 34 retail stores in Canada. The analysts and shareholders didn’t seem to mind, but inquiring minds may wonder whether the store closings are a cause for concern.

Built on a Solid Foundation

Store closings can be a scary event, just ask anyone who bought and held Sears (OTC:SHLDQ) stock over the past several years. In the case of Lowe’s, it can be viewed as part of a warranted shake-up. The CEO change may have been part of that change, and closing underperforming stores might be the latest expression of a push to trim the fat in Canada, Mexico, and the United States.

Concerning the latest round of store closures, Lowe’s CEO naturally put a positive spin on what skittish investors might view as a negative development: “We are committed to the Canadian market and are taking decisive action to improve the performance and profitability of our Canadian operations.”

Mohammad Rahman, associate professor at the Krannert School of Management at Purdue University, provided InvestorPlace with a balanced perspective on the store closings:

“I think it’s important to realize that the closing of stores could be seen not necessarily as a bad thing, especially if Lowe’s is trying to rebalance its online business. If Lowe’s is trying to figure out how the online business compliments the offline business, they’re trying to come up with a strategy where they’re leveraging both channels in a successful manner and the closing of the stores is basically trying to gain efficiency in that effort, that’s not necessarily a bad thing. Now, if the stores are closing because they’re really trying to cut costs, they really don’t have a strategy in terms of leveraging online and offline platforms in a complimentary way and it’s simply a cost-cutting measure, then it’s a bad signal.”

I tend to concur with Professor Rahman, as future developments will shed more light as to whether the Canadian store closures are net positive or negative. Personally, I don’t sense any desperation in the retrenchment and I remain cautiously bullish on LOW shares.

The Takeaway on Lowe’s Stock

I’ll leave it to you to decide whether shareholders were right to dismiss the Canadian store closings and send LOW stock to its highest price ever. My assessment, for what it’s worth, is that Lowe’s was in need of extensive remodeling — and hopefully, the new CEO has the tools to get the job done.

As of this writing, David Moadel did not hold a position in any of the aforementioned securities.

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