Lowe’s Companies Inc. (LOW), in its streak to optimize its financial performance, recently announced measures to enhance its growth prospects by dipping investment in sections of the company that no longer contributes significantly to its growth.
Moreover, Lowe’s will be cutting new store growth targets in North America from 2012 onward. Lowe’s now expects to open 10 to 15 stores per year in North America, nearly half of its previous forecast. However, the company stood by its earlier announcement and plans to open 25 stores in 2011.
After an extensive evaluation, the retailer will pull down shutters on 20 underperforming stores across 15 states in the U.S. Implementing the strategy, Lowe’s closed 10 locations on Sunday, October 16. The company further added that the remaining 10 locations will be closed within a month after the clearance of inventory.
The announcement will affect around 1,950 employees. As per the company, the employees will receive pay for 60–90 days.
Going ahead, the proposal will add a cost of approximately 17 cents to 20 cents a share for the fiscal 2011. Prior to it, the company took a similar stance and closed seven of its underperforming stores.
The move was the need of the hour as Lowe’s posted soft second-quarter 2011 results and trimmed its fiscal 2011 projection. Moreover, Heavy job losses and reduced access to credit have led to a sharp drop in consumer discretionary spending on big-ticket items.
Earlier, Lowe’s announced reformation of its store and merchandising operations to enliven competence, augment operational efficiencies and enrich customers’ shopping experience.
Lowe’s, which faces stiff competition from The Home Depot Inc. (HD), is also rationalizing its capital expenditures to improve its return on investment. We appreciate its approach of cutting new store growth targets in the current consumer environment.
Moreover, Lowe’s announced a $5 billion share buyback program in August. Though share buybacks boost shareholders value, it comes at a cost of future expansion plans, as the free cash can be used to fuel growth.
Further, we believe that spending on big remodeling projects will likely remain under pressure until the housing market stabilizes and consumer spending rebounds.
Currently, we have a long-term ‘Neutral’ rating on the stock. Moreover, Lowe’s holds a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.
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