Lowe's Credits Price Optimization with 0.25% Gross Margin Improvement in Q3

Expanded use of price optimization tools accounted for nearly 30% of a total gross margin improvement of 0.85% at Lowe's during the third quarter, according to the home improvement retailer's executives.

"Gross margin grew by 85 basis points [0.85%] as a result of coordinated efforts across a number of areas, including refinement of our pricing strategy, carefully managed and seasonal sell-through, and our response to customers' increasing demand for the value offered by private branded products," said Nicholas Canter, Lowe's executive vice president, merchandising during a recent conference call discussing the chain's third-quarter financial results.

Canter identified two important changes to the retailer's pricing strategy that were implemented just prior to Q3. "We increased the number of patch areas or competitive pricing zones from just under 90 to more than 210," he said. "This allowed us to price more competitively in each market. In addition, we implemented base price optimization, which adds to the capabilities we have benefited from with markdown optimization.

"Just as markdown optimization has helped us to better tailor our markdown approach to each store based on specific demand for an item, base price optimization determines the best price by item and patch area to optimize our positive price perception and total basket profitability," Canter added.

Price optimization accounted for 0.25% of the retailer's total gross margin improvement of 0.85%, according to Robert Hull, executive vice president and CFO. "The favorable impact from base price optimization and patch area expansion in the quarter was approximately 25 basis points [0.25%]," he said. In addition, lower markdowns on seasonal items such as patio furniture, grills and air conditions "helped gross margin by approximately 25 basis points."

Lowe's sales for Q3 were $11.6 billion, a 1.9% increase over the same period last year. Comp store sales were up 0.2%. With continuing tough times in the housing industry affecting retailers like Lowe's and its competitors, even small movements in a positive direction should be considered good news.

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