Gaining speed

Over the past four years, as the housing collapse, rising unemployment and spooked consumers have hammered the entire home improvement channel, Lowe’s has done its best to blow on the embers of its meteoric rise as the industry’s No. 2 player. Like all good retailers, the North Carolina company kept a careful watch on expenses, scaled back store openings and repeatedly warned investors that “macroeconomic variables” were having a serious impact on its business.

But at the same time, Lowe’s continued to expand, opening more U.S. stores than its two chief rivals (Home Depot and Menards), testing new initiatives (outside sales reps for both homeowners and contractors), and planting flags in new countries (Canada and Mexico). While the downturn lasted longer than anyone—including Lowe’s—expected, the company was setting the stage for the inevitable upswing, when consumers would start reinvesting in their homes, revenues would rise and Lowe’s could get serious about international expansion.

Looks like that moment has come.

“We think the worst of [the economic cycle] is behind us,” said Lowe’s chairman and CEO Robert Niblock, speaking to investors during the company’s Feb. 22 conference call. “I think the American consumer feels much better about their outlook on the future than where they stood a year ago. We’re starting to see them feel a little bit more easy about taking on discretionary product and project purchases. Assuming that we don’t have anything unexpected from a setback in the overall macro-environment, we think that we’ll continue to see hopefully gradual improvement throughout 2010.”

Niblock’s confidence was based on the company’s fourth quarter, where comp-store sales showed a dramatic improvement, declining 1.6% versus 7.5% in the previous quarter. Big ticket purchases, which have been in a freefall for a number of consecutive quarters, bounced back up with a 1% decline. In the previous quarter, transactions over $500 decreased 10%.

Improvements were also seen in installed sales, special order sales, cabinets and countertops. Taken together, all of these indicators spelled “kitchen remodels,” always a major revenue stream for home improvement retailers. While it’s true that Lowe’s gave its customers a little nudge by running promotions—low-cost installation for cabinets and a whole house carpet installation package for $97—homeowners are willing to hop off the fence when they see a good deal.

“Our results in both flooring and cabinets and countertops are another sign that consumers are beginning to show willingness to tackle big ticket discretionary projects,” said president and chief operating officer Larry Stone at the February analyst conference.

Despite its overall optimism, Lowe’s tried to maintain a cautious tone throughout its fourth-quarter conference, warning analysts that unemployment and excess housing inventory still loom over the recovery. The company predicted modest 1%-to-3% same-store sales growth in 2010.

But a closer look at the company’s playbook for this year shows that Lowe’s is shifting additional funds into payroll and even creating new customer service positions before the recovery hits. Lowe’s is lifting the salary freeze it imposed in 2009 on all VPs, as well as reductions on pay increases for sales associates. A system of merit increases is being instituted in 2010. “While this will pressure expenses, we feel this is the right thing to do to keep our more than 238,000 employees engaged and motivated,” Stone said. Postings on RedAprons.com, a Web site unaffiliated with Lowe’s but targeted to its employees, report a flood of new sales associates coming into the stores.

In a recent research report, Lowe’s analyst Colin McGranahan noted: “Lowe’s decision to invest now, before comps turn positive, reflect the company’s key priorities on growth, differentiation and customer service.” But, he noted, if the poor economy drags on, Lowe’s margins won’t return to normal anytime soon, leading to investor discontent.

Lowe’s is willing to take that gamble. “These initiatives…will require us to make investments now to develop infrastructure,” Stone told investors, “with the payoff coming in the second half of 2010 and beyond.”

Both of Lowe’s new initiatives involve sending sales reps out into the field, but to a very different customer group. After a three-year test in the Atlanta, Dallas and Philadelphia markets, the company recently rolled out a “project exterior specialist” to 1,400 of its stores. These employees will visit customers’ homes to measure, quote and sell such products as roofing, siding, fencing and windows. Their efforts will be supported by a centralized project management system that Lowe’s has been developing for some time. A customer survey Lowe’s conducted last year showed that up to 40% of homeowners have been postponing major renovations or additions until the economy improves. Lowe’s is poised to pounce on that pent-up demand at the first glimmer of recovery.

The company’s other initiative, deploying outside sales reps to generate new leads among commercial customers, may be a tougher nut to crack. Lowe’s created the position of district commercial account specialist in 2008 and then tested it in 45 markets. In 2009, the company deployed 125 commercial account specialists nationwide. Their job is to generate new leads among tradespeople, repair remodelers and property maintenance professionals, whose purchases now make up approximately 25% of overall revenues.

Lowe’s wants more—5% more. The company has set a goal of increasing its commercial sales to 30% by the year 2014.

“We want to sell the commercial business across the store,” Stone explained at the company’s third-quarter earnings conference on Nov. 16, 2009. “Not just lumber and building materials and mill-work, [but] categories like rough electrical, rough plumbing, paint, sundries and so forth. [They’re] important categories to that commercial business, [and] that mixes out the margin much more favorably for [Lowe’s].”

In addition to adding 125 commercial account specialists, Lowe’s has standardized its quote process on big projects, which now involves the corporate office and carries a guarantee on quoted prices. Lowe’s expects this change to increase quote-related sales by 25% to $500 million in 2010.

Lowe’s also entered into a partnership with American Express OPEN to offer a Business Reward Card aimed at contractors, remodelers and property managers. The card—launched at the 2010 International Builders’ Show, where Lowe’s sponsored a huge booth this year—was introduced in select markets and rolled out to all of Lowe’s stores in the first quarter of 2010.

Despite these efforts, Lowe’s commercial sales are still lagging, as evidenced by the fourth-quarter results. Sales to commercial business customers fell below the company average, although the company claimed to have picked up overall market share in the commercial segment.

“[When] people get a better feel for how the economy is doing, certainly that will pick that business up,” Stone said in February. “I think it’s just a matter of things turning around a little bit, [and] business will be back to where we would like it to be.”

Laura Champine, an analyst who follows Lowe’s for Cowen & Co., takes a more cautious view. “I’m not sure that the [commercial account specialists] make sense, given how weak the market is right now,” she said. As for the project exterior specialists, Champine notes that in-home selling is a “high touch” model that differs from what Lowe’s has done before.

“There are some markets where they’ll do great and others where they may not,” Champine said. “It all depends on who you hire [to run the program] in each market.”

But overall, Champine is bullish on both the economic recovery and Lowe’s growth strategies. “They’re looking at the next few years and not the next few quarters,” she said, referring to Lowe’s northern, southern and down-under initiatives. (See “Lowe’s goes global”.)

One consequence of the poor economy and unemployment is a reversal of sentiment in many parts of the United States. At a recent Lowe’s store opening in Colorado Springs, Colo., the parking lot was packed on a Friday morning. But across town, in a shopping center slated for another Lowe’s store, tenants complained that the company had yet to give a groundbreaking date for a site in their complex.

“A store like Lowe’s, you can’t go wrong with them,” said one neighboring store owner in an interview with KRDO-TV. “They’re going to come in and bring thousands of customers every week.”

A city official said Lowe’s is “standing by” and will track sales at the newly opened Colorado Springs, Colo., store before it makes any decision. But the company has already announced that it intends to open 40 to 45 new stores in fiscal 2010. If Lowe’s optimism is well founded, Colorado Springs may get two of them.