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Lowe's Companies: Upcoming Analyst Day Could Be A Key Catalyst

 December 03, 2012 12:33 PM

(By Mani) Lowe's Companies Inc. (NYSE: LOW) will have its annual analyst day on Dec. 5 in Charlotte. While the home improvement retailer is expected to discuss several operational initiatives underway such as mylowes.com, the line review and clearance process, end-caps and drop zones, the major focus would be on the new 5-year outlook.

Typically Lowe's looks out five years, which will take us to 2016. A year ago, it outlined a 2015 plan that included annual sales growth of 4.5 percent, an operating margin of 10 percent, which would equate to 2015 earnings of $3.66 a share.

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"Our 2015 model is below LOW on those metrics, primarily on the sales outlook. We expect LOW to make adjustments, particularly as it relates to the annual sales outlook, but most importantly, we believe the plan will include a path towards higher operating margins and continued share buybacks," Deutsche Bank analyst Mike Baker said in a client note.

Meanwhile, Lowe's is expected to buyback an additional $550 million in stock this year, bringing the full year total to just under $4.2 billion. While this is below the planned long term average of $4.5 billion annually through 2015, the slightly lower plan is due to timing around its working capital outlook. The company's previous plan resulted in a revised cash flow from operations of about $3.4 billion this year compared to the original $4.2 billion

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"We are not overly concerned about this push out as we believe LOW will reiterate its average buyback plan at its analyst day," Baker said.

The company could provide some additional cash for buybacks, and with the individual dividend tax rate on dividends set to jump by as much as 30 points on 1/1/13, Lowe's could address this line item as well as it is currently sitting at approximately $800 million.

Along with share buybacks, a key part of the Lowe's investment story is that comps will improve in 2013 as macro factors like improved housing converge with company specific factors, primarily benefits from its line review process.

The company is well under way with its merchandising transformation. Line reviews will be largely completed by the end of the year with merchandise resets expected to be wrapped up in mid-2013 Comp and margin benefits from management initiatives should start to accrue more meaningfully in mid-2013.

"We estimate that LOW is about 75% through its line reviews, has reset about 50% of the product and had moved out clearance in about 20%, where comps had increased in the mid single digit range and margins were up 100 bps," Baker noted..

If that comp lift continues, Lowe's should see an incremental 1-2 percent gains to comps next year as the line review process rolls out.

In addition, the company appears to be having some success with customer engagement through its e-commerce initiative -mylowes.com. Customers that sign up for mylowes.com spend more than those customers that are not in the program and it continues to learn from its acquired ATG Stores asset. E-commerce now accounts for only about 1 percent of sales, but up 70 percent year-over-year as of the last quarter.

"While the home improvement space does not have the same e-commerce threat as other hardline spaces, it does represent an opportunity in our view and likely something that LOW will focus on at its meeting," the analyst wrote.

Moreover, analysts are also expected to ask questions over Lowe's expansion plans in Canada, where it has withdrawn its takeover offer for Rona, Inc. (TSE:RON). Although Lowe's has officially dropped their bid on Rona, with some management and potential board changes at the Canadian counterpart, investors will want to gauge any renewed interest by Lowe's.



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