Getty Images Lowe’s latest store closures may not be the last, analysts say.
Lowe’s Cos. Inc.’s Monday announcement that it would shutter 51 “underperforming” stores, 20 of them in the U.S., is the second set of closures in Marvin Ellison’s short tenure as chief executive of the home renovation retailer, and analysts say they might not be the last.
The company announced in August that it would close all 99 Orchard Supply Hardware stores, located in California, Oregon and Florida, and its distribution facility by the end of fiscal 2018.
On the second-quarter earnings call discussing the move, Ellison said the company had to simplify for better results.
Read: These Lowe’s stores are closing in the next three months
“[M]y experience has taught me that a simplified organizational structure is the first step to create operational excellence and allow for faster decision-making,” he said, according to a FactSet transcript. “[W]e decided to exit our Orchard Supply Hardware operations to allow us to focus on our core home improvement business.”
Ellison became CEO effective July 2, 2018. Before joining the company, he was chief executive of struggling department store retailer J.C. Penney Co. Inc. JCP, -7.59% That company, whose turnaround continues, closed 141 stores in fiscal 2017.
Bill Fahy, senior credit officer at Moody’s, says it’s normal for a new CEO to examine the portfolio of stores.
“Anyone doing a strategic review of the company, it’s something you expect them to look at,” he said.
Moreover, Fahy notes that the majority of stores that are closing are within 10 miles of another Lowe’s LOW, -2.66% location.
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“Consumers still have a Lowe’s store to go to,” he said. “If all of a sudden I’m losing a store, I might have to go to the competition.”
With only 20 stores closing in the U.S., Fahy said “it’s not all that many.” The rest of the closures will take place in Canada. Lowe’s said it would go into further details in the next earnings release on Nov. 20. And Fahy expects even more detail about the company’s strategy at the December 12 investor day.
Wells Fargo analysts said the closures are “not surprising” and “more could be coming.”
“[It] could suggest the beginning of a broader initiative to improve profitability via real estate rationalization,” analysts led by Zachary Fadem wrote.
Lowe’s beat earnings expectations in the second quarter, but fell short the previous two.
Home Depot Inc. HD, -1.07% , Lowe’s biggest competition, has beaten earnings expectations the past 15 quarters.
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Home Depot sales totaled $100.9 billion the previous fiscal year. Lowe’s brought in $68.6 billion in revenue.
Ellison worked at Home Depot for a dozen years, rising to the executive level, before leaving for J.C. Penney.
“[W]e believe all options remain on the table for a new CEO in Marvin Ellison that has thus far displayed a propensity for acting quickly (following recent management realignment and the decision to close its 99 Orchard Supply stores),” Wells Fargo said.
“We continue to view Lowe’s in the early innings of a multiyear turnaround, and while expectations of near-term improvement are low, we see considerable opportunities from Pro [professional] initiatives, inventory rationalization, and store/processes improvements.”
Wells Fargo rates Lowe’s shares outperform with a $125 price target.
Lowe’s shares are up 4.4% for the year to date, outpacing the S&P 500 index SPX, -0.92% , which is up 2.7% for the period.
