Lowe's has 'a big window of opportunity' after shutting down its underperforming stores, UBS says

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A Lowe's worker helps a shopper move furniture

• Lowe's on Tuesday reported third-quarter earnings that beat on both the top and bottom lines but saw comparable sales miss Wall Street's estimates.
• Lowe's also said it will exit Mexico retail business and some non-core US businesses, following previous announcements to shut down Orchard Supply Hardware operations and close 51 underperforming stores in the US and Canada.
• The closure schedule will boost same-store sales of surviving Lowe's locations that are close to storefronts slated to be closed, UBS said.
• Watch Lowe's trade live.

Lowe's recent decision to close underperforming stores will help the retailer survive in the brick-and-mortar meltdown, said UBS in a bullish note titled "still a big window of opportunity."

"We think Lowe's has significant runway for earnings growth as it improves its execution, exits underperforming ventures, and removes excess costs from its profits and losses," a team of UBS analysts led by Michael Lasser said in a note distributed on Wednesday.

The home-improvement retailer on Tuesday reported third-quarter earnings that both sales and profit expectations. However, same-store sales grew 1.5%, missing the 3% increase Wall Street expected according to Bloomberg data.

As part of this reassessment, the retailer said Tuesday it will exit its Mexico retail business as well as some non-core US businesses including Alacrity Renovation Services and Iris Smart Home. These actions are in addition to the previously announced decisions to exit its Orchard Supply Hardware operations, and close 20 underperforming stores in the US and 31 stores and other locations in Canada.

Most associates at the affected stores will be extended opportunities to transition to similar roles at nearby stores, according to the company.

By UBS' calculation, there are 16 surviving Lowe's stores within a 15-minute drive of the stores slated to be closed in the US and the corresponding number of Lowe's stores in Canada is 38, suggesting that comparable sales of the surviving stores will likely get a boost.

"We calculate that these stores closures could add 30-50 basis point [or 0.3% to 0.5%] to Lowe's same-store sales," said the team led by Lasser.

Lowe's jumped 2.74% on Wednesday and is down 3.35% for the year.

Now read:

• Lowe's is closing all 99 locations of a California-based hardware-store chain it bought in 2013
• Lowe's is closing dozens of stores across the US and Canada - here's the full list
• J.C. Penney tumbles as its CEO heads to Lowe's

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