Lowe’s plans to cut more costs despite better-than-expected earnings

Lowe’s reported better-than-expected earnings and sales for the third quarter on Tuesday. But the company said it will exit its Mexico business, as well as a “non-core business” at its headquarters in Mooresville, as part of an ongoing effort to improve profitability.

Tuesday’s announcement marks the latest cost-cutting initiative Marvin Ellison has taken since taking over as CEO of Lowe’s in July. Ellison, formerly CEO of J.C. Penney, last month announced plans to close dozens of underperforming stores in the U.S. and Canada, for instance. Lowe’s is also closing a home-improvement chain it bought in 2013.

Ellison has described the recent moves as ways the company is prioritizing its core business.

In other words, Lowe’s is trying to redirect its time and resources away from money-losing projects to focus on things that’ll make it a go-to home-improvement destination, including improved customer service, well-stocked stores and an efficient supply chain.

“What we’re trying to do is just get a laser focus on our core retail business, our stores and our digital platform,” Ellison said in an interview with the Observer.

In a statement, Lowe’s said earnings for the quarter were $629 million, down from $872 million during the same quarter of 2017, mostly because of costs related to store closures. Adjusted for non-recurring costs, earnings were $1.04 per share. Analysts surveyed by Zacks Investment Research estimated 97 cents per share.

Sales for the quarter were $17.4 billion, up 3.8 percent from a year ago and above the $17.33 billion estimate from Wall Street analysts. Same-store sales, an industry term that gauges the health of a retailer and refers to sales at stores open at least a year, rose 1.5 percent. Same-store sales in the U.S. rose 2 percent.

Lowe’s said it is exiting its retail business in Mexico, where it operates 13 stores, and is exploring a broad array of alternatives for the business, including a sale, Ellison in the call. “Obviously if we sell the business, the new owner will make the decision about what to do with those stores,” he added.

The company also said it has identified “certain non-core activities within its U.S. home improvement business to exit,” including its Alacrity Renovation Services and Iris Smart Home businesses. The Alacrity business is located primarily in Eugene, Ore., and the Iris business is primarily in Mooresville, the company said, although it would not say how many workers are impacted.

Lowe’s decision to exit its Mexico business comes weeks after the company announced plans to close nearly 50 underperforming stores across the U.S. and Canada by Feb. 1.

And this summer, Lowe’s said it would shut down its Orchard Supply Hardware chain, which the company bought in 2013 for $205 million, in order to “focus on its core home improvement business.” Lowe’s is in the process of closing all 99 Orchard Supply stores — which are in California, Oregon and Florida — by the end of the year.

“Our top priority in the third quarter was positioning Lowe’s for long-term success by identifying underperforming or non-core businesses and stores for divestiture,” Ellison said in the statement. “With our strategic reassessment substantially completed, we can now intensify our focus on the core retail business.”

Lowe’s shares closed Tuesday at $86.15, down nearly 5.7 percent.

Edward Jones analyst Robin Diedrich said that it is encouraging to have “new blood” in the company willing to make tough but important decisions like closing stores.

“It’s sort of a retail 101 strategy,” Diedrich told the Observer. “If you have a great brand like Lowe’s and you have a good industry, a great opportunity to grow market share … why not put all your dollars and focus on that core business?”

Some analysts have been skeptical about the future demand in the home-improvement industry. Ellison, however, said the company remains optimistic because of positive macroeconomic trends, including wage growth, consumer confidence and home price appreciation.

Citing his own experience as a recent homebuyer who chose to renovate in Charlotte, Ellison said it’s not uncommon to see people investing in their properties.

“We purchased a home that’s a little older, but we’re remodeling,” Ellison said. “A lot of customers are just like us.”

Lowe’s chief rival, Atlanta-based Home Depot, continues to benefit from a strong housing market. The company last week reported better-than-expected earnings and sales, as shoppers continued spending on home-improvement projects. Same-store sales surged 4.8 percent company-wide.

Since taking over as CEO, Ellison has initiated significant changes at Lowe’s, including in its executive leadership ranks.

For instance, in early July Lowe’s said that several high-profile roles, including chief operating officer and chief development officer, would be eliminated, and responsibilities formerly under these jobs would be assumed by other senior leaders who report directly to Ellison. This month, Lowe’s hired Seemantini Godbole, Target’s senior vice president of digital and marketing technology, as its new chief information officer.

“Our transformation will take time, but we have assembled an experienced team and developed a comprehensive plan to make steady progress,” Ellison said in the statement Tuesday.

The Associated Press contributed.

This story was originally published November 20, 2018 at 7:25 AM.