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Lowe's Is Sprucing Up Its House


For 17 years, Sandy Cooper was a loyal customer of Home Depot Inc. But when her refrigerator recently went kaput and Home Depot told her it could take four days to deliver a new one, the mother of four went straight to a Lowe's Cos. store in the Brookhaven section of Atlanta--which promised to deliver a new fridge the next day. "I have to sing their praises, because they were very nice," says Cooper, 45. "At Home Depot, you can't find anybody to help--and if you do, they just point."

Based in Wilkesboro, N.C., Lowe's--the No. 2 player in home improvements, with 785 stores--is staking its future on pleasing thousands of shoppers just like Sandy Cooper: women who will shop for big-ticket appliances and high-margin home furnishings at its urban stores. Indeed, a few days after getting her refrigerator, Cooper returned to buy light fixtures. She is the kind of customer Lowe's needs if its ambitious $2.9 billion plan to add 123 outlets this year, most of them in big cities, has any chance of success against Home Depot, still top dog, with 1,392 stores.

Lowe's is pushing hard for growth to make up for lost time. The top home-improvement chain until the late 1980s, it was knocked off its perch as Home Depot embraced "big-box" retailing, while Lowe's clung to its small-town stores. Robert Tillman, 58, who has worked at Lowe's for 39 years, became CEO in 1996. A year later, fearful that Lowe's would forever lose out to Home Depot, Tillman began to open a handful of larger stores in metro areas. Now, Lowe's is accelerating that rollout just as Home Depot, which has saturated the largest markets, slows its expansion in order to squeeze more sales out of existing stores.

The duel between these home-improvement giants is one of the best shows in retailing today. In recent years, Lowe's earnings gains have outpaced its big rival's (chart). In the first quarter of 2002, same-store sales at Home Depot rose 5%. But Lowe's, which opened 46 stores in the quarter, did even better: Its same-store sales climbed 7.5%. Lowe's profits jumped 54%, to $346 million, in the quarter. Home Depot failed to keep pace, as profits rose only 35%, to $856 million. While Lowe's stock recently closed at $46.13, disappointed investors bid Home Depot shares down to a 52-week low of $42.70 after its earnings announcement. In fact, over the past year, Lowe's stock price has climbed 31.1%, while Home Depot shares have fallen 19.6%.

The difference between a Lowe's store and a Home Depot has been fairly clear-cut up to now. Presentation counts at Lowe's. Its warehouse-style stores are laid out so that two shopping carts can pass in comfort--a feature that has helped Lowe's appeal to women shoppers like Cooper. It has made a conscious decision to target women because, as Executive Vice-President for Merchandising Dale C. Pond says, "80% of [home] projects are initiated by females." That effort is paying off. In the late 1980s, only 13% of Lowe's shoppers were women, and many such customers were turned off by buying things "in lumber shops," says Tillman. Today, half of Lowe's clientele is female, and the chain is attracting more and more nonprofessional home-improvement shoppers.

Lowe's is also focusing more on higher-margin goods--everything from Laura Ashley paints to high-end bathroom fixtures. Two years ago, for instance, Lowe's sold only $99 gas grills. "We looked just like Kmart and Wal-Mart," says Pond. Now, the front of Lowe's floor display for grills features $899 stainless steel Jenn-Air models. It's no coincidence, then, that gross margins were 29.7% in the last quarter, up from 28.3% the year before.

Home Depot, meanwhile, has traditionally relied on low prices, lots of selection, and sales of building materials to professional contractors. But as Lowe's moves into bigger metro markets, Home Depot is apparently fighting it every step of the way--and that means going after some of its rival's biggest spenders. Home Depot has cut back its overall expansion pace, even though it still plans to open 200 stores in 2002, four fewer than last year. Some of those new stores are smaller "neighborhood" units, designed for urban markets such as Chicago and Brooklyn, N.Y., and Expo Design Centers, aimed mostly at women. Home Depot already has 48 of those centers, which provide decorating services and other high-end goods. And to counter Lowe's huge share of major appliance sales--its 12.1% of the market is larger than any retailer except Sears, Roebuck & Co.--Home Depot says it will build larger appliance sections in 200 existing stores and include them in new stores as well.

Although the time may be approaching when there is a Lowe's or Home Depot on every corner, Tillman isn't worried about that yet: "We see nothing on the horizon that will keep us from growing at these rates." Right now, investors are giving Lowe's the benefit of the doubt. "Among large-cap companies, this is one of the few out there with 18% revenue growth," says R. Crit Thomas, portfolio manager of the Armada growth funds, which hold 325,000 Lowe's shares.

To keep growing at this pace, though, Lowe's has to battle Home Depot on its home turf, expanding into big markets such as Boston and New York. That looks like a risky strategy. True, Lowe's figures that its stores in the Northeast can gross $50 million per year, compared with a chainwide average of $32 million. And there seems to be plenty of room to grow: Lowe's now has only 50% of its stores in metro markets. But Home Depot has chewed up many a competitor. So as Lowe's and Home Depot battle it out, the result could end up being "slowing growth, maturation, and declining returns on investment for all," says Morningstar Inc. retail analyst Mike Porter.

To finance its expansion, Lowe's has added $2 billion in long-term debt during the past two years. Bond analysts remain confident it can handle the burden. "We don't have any concerns about [Lowe's] ability to refinance any upcoming maturities," says Standard & Poor's bond analyst Patrick Jeffrey. But if the economy weakens or housing sales slump, shoppers could end up snubbing Lowe's high-end goods--making its new stores a liability. So far, Tillman is confident that Americans will keep spending money at home. And he's willing to bet the house on it. By Aixa M. Pascual in Wilkesboro, N.C.


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