Client: Crystal Anderson ADV Corp W2018 9 Team:Haseeb Chaudhry – 100556310Ashraf Ali – 100551053Kalpen Patel – 100557474Jordan Pereira – 100555874 Professor:Bin Chang Industry Analysis Lowe’s Companies Inc. operates within the home renovation retail industry, and has been identified as a major player within the extremely competitive industry with the continuous plans of future expansion and growth. The home renovation retail industry has been credited with great success and has achieved annual revenues in the U.
S. totalling approximately $150 billion (p.1). As of 2012, Lowe’s had become the second largest retailer of home renovation products in the world behind The Home Depot and was even listed 50th on the Fortune 500 list for 2011 (p.4). Despite all the growth that Lowe’s has experienced and the continuous demand found in the home renovation retail industry, there are several risks and opportunities that exist which must be taken into consideration for investment purposes. As was mentioned within the case, the home renovation retail industry is heavily dependent on seasonal and economical influences (p.
2). Being heavily dependent on seasonal factors leaves small room for profit and growth measurements as sales are seen to be minimal during winter days due to customers electing to engage in any type of renovation or construction when the weather is more in favour (p.2). The industry being seasonal also allows for only the top competitors to enjoy sales as there isn’t enough time for other less populated companies to make profit. This also leads into an opportunity for the current top competitors like The Home Depot and Lowe’s to not have to worry about the threat of new entrants as the initial capital required is too high and profits cannot be attained at a consistent rate throughout the year.
Another factor that is taken into account when assessing the opportunities present within the industry is seen through the growth that continuous to occur with future expansion plans already in place. As the demand is high for products provided within the industry, there are no direct substitutes currently available for home renovations and construction. With having the threat of substitute products very low the industry is expected to continue growing providing the opportunity for top companies to further expand with ease. The home renovation retail industry is also heavily influenced by economic influences. The industry is once again seen to be influenced by factors that are not controllable as economic conditions could change at any given time. The industry is primarily run through its home renovating and home constructing products and sales are at risk of being impacted greatly when an economic recession or housing market decline is taking place due to how much sales depend on the housing market (p.2).
This also displays how if there is an increase in the sales of houses, the economic influences towards companies like Lowe’s would result in a generation of profits as more individuals would be influenced to renovate their homes and sell within the booming real estate period. The economic risk attached to the home renovation retail industry can also be seen through the economic recession that took place in 2008 which resulted in a massive decline within the industry for over a two-year period (p.2). Lowe’s Strategy Upon entering the industry, Lowe’s implemented a strategy that would offer lower prices to customers than they were accustomed to as Lowe’s products were bought directly from the manufacturers as opposed to dealing with distributors (p.
3). Throughout its growth and success, Lowe’s continued to remain committed to its original principals and strategy of offering quality home improvement products at the lowest prices while providing great customer service (p.4). Lowe’s success can be associated with the successful implementation of this strategy as this strategy was different and not in place by any of the other top competitors. Competitors like RONA and The Home Depot did not have this strategy in place with their operations as their price offerings did not match up with the deals and customer service consumers would receive at a Lowe’s location.
Lowe’s commitment to providing excellent customer service reached the point where Lowe’s would hire and train employees for the sole purpose of reading and understanding what customers want (p.4). Lowe’s current strategy and future goals include moving Lowe’s from a home renovation retailer to a home improvement company that would onto enhancing customer experience and customer needs. Lowe’s also conducted plans to further expand into Canada like the Home Depot has in hopes of gaining further brand attention (p.5).
In forecasting and implementing these strategies, it is more than evident of the standard that Lowe’s keeps themselves and has become something that customers all around the world realize and appreciate make the industry more competitive than ever. Lowe’s ExpansionSince inception of Lowe’s the company has been expanding and growing significantly. In 2006, Lowe’s was aggressively expanding and opening a new store every three days (pg. 4). Their competitors such as RONA and Home Depot were also expanding as well.
In 2008, stores in Canada and Mexico were opened (pg. 4). Home Depot had first entered the Canadian market in 1994 (pg. 3) and this immediately posed some competition for the company. While sticking to its business model of getting customers to spend more on each visit, they managed to stay competitive. In 2011, Lowe’s opened 19 stores in Ontario alone. The same year, they had also partnered with Woolworth’s Limited and created a Master’s Home Improvement Centre in Australia by September.
Masters became publicly traded with one-third of the company being owned by Lowe’s. (pg. 4).
Lowe’s strategy was to better their customer service and sales in order to help customers. This was done through product training by their employees. on products 2011 was a big year for the company as it was also the same year that same-store sales had increased since the economic recession.
Net sales this year were over $48 billion while net earnings were over $2 billion. With grand success and adhering to the company’s strategy, they managed to become the world’s second largest retailer of home improvement products by 2012. Cash Flow AnalysisFrom the statement of cash flows we get to know the sources of where the company is getting its cash from and where it spent its cash. We can further know this changes by breaking the statement of cash flow into, cash flow from operations (CFO), cash flow from financing activities and cash flow from investing activities. Cash flows from operations (CFO)CFO basically measures the capacity of the company to operate or function. Between the year 2009 and 2010 there was an economic recession (pg. 4) and therefore it is expected for the company to slowdown.
However, this may not be the case from a cash flow standpoint for Lowes net cash flow from operations saw a decent increase of 4.20% that is from $3506 million in the year 2009-2010 to $3661 million in 2010 to 2011. This is great because the increase illustrates that the company is able to convert net income into cash thus profitable that can be used for other activities. Since Lowes cash flows from operation are positive, we can make an assumption that the company is at a safe position and bringing in cash that can be reinvested again into the company. Cash flows from financing(CFF)Cash flows from financing shows the company’s financial activities with the company itself, shareholders and lenders.
The biggest transaction we see in this section is that Lowes rewarded $2.946 billion in dividends to its shareholders in the year 2010- 2011, which is a substantial increase from just $525 million in the year 2009-2010. This move may have come to convey to investors that the company is just doing fine and had weathered the storm. To reward Lowes shareholders in the fiscal year 2010-2011, the company had borrowed $2 billion in long-term debt to finance this transaction. Alongside its $2 billion transaction Lowes also paid its current portion of long-term and cleared short-term debt.
Because the 2009-2010 was a year for economic recession, some companies tend to be undervalued, therefore increase their share repurchasing and Lowes believed it was one of them. The company believed it was being undervalued by “Mr. Market”, therefore in 2009-2010 so it repurchased common stock worth $277 million and just $47 million in 2010-2011 which was a year of recovery. During recovery year stocks tend to jump by about 50% or so therefore Lowes made a lower common stock repurchase during this time because the company believed that it may just be valued at right level. Therefore, resulting in a decrease in CFF for the year 2010-2011 by -4.588%.
Cash flows from investing(CFI)CFI is the changes of a company’s investments or buying and selling capital assets. Lowes spent a lot of its cash buying properties for both of its fiscal year ($1.391 billion 2009-2010 and 1.
176 billion 2010-2011). This is good as this shows that the company used its cash to reinvest into the company’s long-term future. The companies also made big long term investment purchase in 2010-2011 worth $731 million and purchase of other assets of worth about $138 million which was a significant investment since 2009-2010. The company’s investing cash flows for 2010-2011 increase by 42.28% which illustrates that the company made the right use of its cash that it had for investments that will benefit the company in the long run. Investment Quantitative AnalysisProfitability Ratios:As you can see the financial ratios table above, which we calculated using the data from 2009 to 2011. You can notice that the profitability ratios are gradually increasing and have a better numbers comparing to 2009, which could be caused by financial market crisis at year 2008.
When the market crashed and the economy dropped which then had impacted on Lowe’s and retail industry ratios. Lowe’s actually did good comparing to its industry’s ratio 2010, their gross profit margin was off by 0.14% and did better on return on equity than industry by 2.35% but vice versa Lowe’s did not do good on return on assets comparing to its industry. But, as the economy got better in previous years, the ratios have been changing and increasing in positive direction.Liquidity Ratios:As for the liquidity ratios, Anderson shouldn’t be that concern. Everything seems to be under control the current ratio is increasing, which means they have the ability to pay the short and long term debt on time but if we compare Lowe’s current ratio to its industry ratios at year 2010, then Lowe’s did not do so well. They were off by 1.
677.Investment Utilization or Turn over ratios:As for the Turn over ratios Lowe’s is in pretty good shape. The calculation shows how efficient and how quick they are in terms of selling and liquidity. The inventory turnover ratio is increasing which is a good sign because it shows how efficient Lowe’s inventory are and how fast they are with generating cash comparing to its industry ratios Lowes actually did better than its industry at 2010 by 2.72.
Stability Ratios & Growth Ratios:Debt Ratio is slightly increasing comparing to previous years that can be caused by expanding and financing more debt to established more stores. So that shouldn’t be a concern to Anderson. As you can see that sales growth and Profit Growth are increasing from negative to positive which shows a good sign in terms of investing between that means that the company is profiting and are stable. The sales growth and profit growth are negative in 2010 and positive in 2011, which explains the economy crisis which happened in 2008 when the market crashed and everything dropped. Investment ObjectiveIt seems that Anderson is looking to have a steady retirement portfolio and understands that her primary objective for investments is growth. This is due to her above average risk tolerance and long term investment plan.
According to the numbers of Lowe’s we can see that after the recession of 2008, the home improvement industry was making a slow but strong recovery. While sales were increasing by 1% in 2010 and 5% in 2011 (pg.2), Lowe’s managed to capitalize on this, allowing them to be the 2nd biggest home improvement retailer in the world only 1 year later. Due to her risk tolerance, Lowe’s would still be a good investment choice as interest rates are low and now the company has easy access to cheap debt in order to fund training, store expansion, and production expansion to better attend to customer needs.
By their actions, Lowe’s is directing itself through long term growth. This is demonstrated by it’s investment in training for employees. The Numbers The Formulas