Lowe's Is Building an Extension -- in Home Depot's Yard


Home Depot (HD) and Lowe's (LOW) both decided to keep their doors open on Apr. 15, Easter Sunday. Skeptics suspect that sales have been so bad of late at the world's two top home-improvement retailers that the companies were grasping for an extra shopping day to bolster fiscal first-quarter results. The companies dismissed the notion. But neither can deny that they're feeling the pinch of the slowing U.S. economy.

Of the two, investors are more worried about Lowe's. Both chains have been expanding like gangbusters over the last several years. Most analysts are clinging to positive investment ratings on both stocks, pointing to interest rate cuts as a boon to the housing and home-repair market.

PLAYING CATCH-UP. But perennial and distant No. 2 Lowe's has been growing a lot slower than its colossal rival. And Lowe's has given investors added reason for concern because it's moving out of its stronghold in rural America into new, more urban territory that's already well covered by Home Depot. Lowe's has a $1.3 billion, five-year plan to open new stores in Northeast markets, as well as other expansion initiatives in Florida and on the West Coast.

That has led some analysts to fret that Lowe's might not be able to deliver on its cheery 2001 earnings forecast for the fiscal first quarter, which closes on May 4. "Now, with the economy huffing and puffing, there's potential that they may miss their numbers," warns Brian Postol, an analyst with A.G. Edwards & Sons.

Lowe's has certainly been far more upbeat than other retailers lately. The Wilkesboro (N.C.) company has signaled that it expects to post diluted earnings of 56? to 58? per share for the first quarter, compared with 49? for the same period a year ago. The company expects a total sales increase of around 20% vs. last year, when it earned $187.1 million on revenues of $4.4 million in its fiscal first quarter. But then the company also disclosed that sales from stores open at least a year will be flat or slightly negative for the quarter.

Robert Tillman, Lowe's CEO since 1996, must now prove he can deliver on the high expectations. The company's optimism could be justified if its new stores in larger regions steal market share from Home Depot, as some analysts expect. Also, Lowe's has finally finished converting Eagle Hardware & Garden Inc., which it bought in April, 1999, into Lowe's stores. "We had a major re-merchandising effort completed last December for Eagle. Now we're able to move forward in trying to regain customers lost during that disruption," says Chris Ahearn, a company spokesman.

GE MAGIC. By contrast, the new CEO at Atlanta-based Home Depot has taken a far more conservative tack. In December, Robert Nardelli, who had been CEO of General Electric's Power Systems unit, took the top job at Home Depot after being passed over to replace Jack Welch as GE's chief. Nardelli, who was much sought by other companies before taking his new job, appears to be trying to dampen investors' expectations, at least in the near term. "We expect that many of the same economic factors affecting sales in the current quarter will persist in the first half of fiscal 2001, arguing for a cautious near-term outlook," the company said in a statement in January.

While Home Depot dampens expectations, Lowe's shares have been outpacing most other retailers. The stock remains strong, closing at just under $60 on Apr. 18, not far off the 52-week high of $64.60 it hit in March. That contrasts sharply with Home Depot's shares, which trade in the low 40s and are down about 15% since the beginning of the year.

Still Lowe's has a lot of ground to make up. Its price-earnings ratio is around 22, vs. about 33 for Home Depot. But that gap, too, has been narrowing.

In part, Lowe's is benefiting from concerns about slowing growth at Home Depot. The top home-improvement retailer has 1,101 stores worldwide, almost double the 650 at Lowe's, which operates only in the U.S. Home Depot is still adding lots of stores -- 200 in 2001 -- while Lowe's will add 125.

ROOMY MARKET. But that kind of expansion can only go on for so long. One worrisome sign: Home Depot has started to play up smaller projects like its international stores and EXPO Design Centers. "Those are never going to be as exciting as building store base. And at some time that will end," says Angela Auchey, assistant vice-president and portfolio manager at the Federated Large Cap Growth Fund.

For now, Lowe's appears to be on the right track. Home improvement is a growing business, especially with interest rates still trending downward. And neither company is anywhere near saturating the market. "If you take the whole home-improvement industry on a national perspective, the two companies combined only have small market share," says Maureen Carini, a retail analyst at Standard & Poor's. But over time, the markets of the two players will overlap more and more. That's when the hammer could come down. By Amy Tsao in New York


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