Less is more at Lowe’s
At the recent Raymond James investors conference in Orlando, Fla., one home improvement company after another sent their executives up to the microphone to deliver the less-than-sanguine news. Home Depot, Masco, Stanley Works, Black & Decker, Toll Brothers and Mohawk talked about consumer apprehension, tightening credit markets, head count reductions, economic pressures and “weathering the storm.”
Larry Stone, Lowe’s president and chief operating officer, appeared on March 11, the last day of the conference. Stone began his 8:05 a.m. presentation with the company’s fiscal results for 2008, which he described as “another difficult year for Lowe’s.” Earnings fell 22% to $2.2 billion for the home improvement retailer, and same-store sales dipped by 7.2%. Consumers weren’t spending much on big-ticket items; kitchen and bath remodels were down. Even the holiday season had been disappointing, forcing Lowe’s to discount its Christmas merchandise early.
“My message to the team this year was a simple one,” Stone said, referring to the company’s annual meeting for store managers and merchants, held this year in late February. “In this environment, we must remain focused on what really matters.”
Stone then outlined Lowe’s priorities, which really haven’t changed much over the past 10 years. Good customer service, operational efficiency, healthy margins and other tenets of retail success dominated the rest of his presentation. It wasn’t until the question-and-answer session, when investors asked pointed questions about the company’s market share, growth plans and fiscal outlook, that Lowe’s altered landscape came into view.
The Mooresville, N.C.-based chain, which originally announced it would build 75 to 80 new stores in fiscal 2009, has pruned that number to somewhere between 60 and 70 units. Lowe’s has pulled the plug on at least 37 projects that were previously approved, cancelling stores in towns like Farmington, Maine; Canton, Conn.; Everett, Mass.; and Sacramento, Calif. Other projects have been postponed for a year or two.
The stores that Lowe’s does build will be more modest; this is especially true for the company’s traditional 117,000-sq.-ft. format. After building 103,000-sq.-ft. stores in size-constrained metro areas, Lowe’s executives discovered that their customers don’t notice the difference. Shaving off 14,000 sq. ft. will save the company $2 million in capital outlay per store, not to mention ongoing cost savings in heating, cooling and maintenance.
“The vehicle of choice moving forward is the 103,000-sq.-ft. store in most large- and mid-sized markets,” executive VP Greg Bridgeford told investors at the company’s annual investors’ conference last September. “In the high-volume metro opportunities, we may opt for the 117,000. But you’ll see the majority of our projects in the future with the 103,000-sq.-ft. footprint.”
Lowe’s has been testing two smaller format stores, and these are being readied for prime time. Both have drive-through lumberyards and relatively large garden centers. In 2008, the retailer opened an 80,000-sq.-ft. prototype in an undisclosed location. And this year, Lowe’s went even smaller.
The newest format, a 66,000-sq.-ft. store in rural Tarboro, N.C., held a grand opening on Jan. 2, 2009. At half the size of a standard Lowe’s, the store still features a 20,000-sq.-ft. garden center and 30,000-sq.-ft. lumberyard, both outdoors. The SKU count is 32,000 items, compared to 40,000 SKUs in a traditional Lowe’s store.
Lowe’s refers to these two formats as its “small market” stores, which it has developed for rural communities with 15,000 to 20,000 households. The company likes to take its time with a new prototype, testing and tweaking it for at least two years before it commits to any rollout.
But the recession has changed the course of Lowe’s carefully plotted U.S. expansion. The “high volume metro opportunities” on the horizon last September have all but disappeared. At the Raymond James conference in March, Stone told investors that the retailer was backing away from the metro markets for now.
“Most of the expansion this year is going to be in the small- to mid-size markets,” Stone said. “We still think there is tremendous opportunity in the larger metro markets, the top 25 markets of the country. But quite frankly, based on economic conditions in a lot of those metro areas, there is just no way right now you can justify the new store and the cannibalization it has on the existing stores in the market, because they are all reeling from the housing pressures and all of the other pressures in the market.”
Lowe’s still plans to build “2,400-plus stores” in the United States, Stone said. But, he added, “It might take us 10 years to get there.” International expansion is still on track, with three stores under construction in Canada, bringing the total Canadian store count to 14 units in Ontario.
By this time next year, Lowe’s sees itself expanding into western Canada and breaking ground south of the U.S. border. By January 2010, the $48.2 billion retailer says it will open two stores in Monterrey, Mexico. “We really try to stay focused,” Stone said.
Mining market share
Although Lowe’s has always held the No. 2 spot behind Home Depot in the home improvement market, the company managed to forge its own identity with brighter stores, wider aisles and other “female-friendly” characteristics. But Home Depot’s rival is now sprucing up its stores, emphasizing customer service and revitalizing its assortment. The recession has also leveled the playing field in terms of sales: nobody is performing well these days.
“The lead Lowe’s has enjoyed versus Home Depot in terms of same-store sales growth has all but disappeared,” observed Nick McCoy of Retail Forward.
Tracking done by Retail Forward shows that Lowe’s has steadily gained market share in the past few years, rising from 10.6% in 2003 to 14.3% in 2008. But these home improvement sales are not necessarily being swiped from Home Depot, according to McCoy. “Lowe’s expects to benefit disproportionately from the industry consolidation that is occurring as the housing downturn runs its course,” McCoy wrote in a 24-page research report on the company. Lowe’s will continue to gain market share from the “Moms and Pops” that fall prey to the current recession.
Lowe’s seems to think so, too. At the Wachovia Nantucket Equity Conference last June, executive VP and CFO Bob Hull told analysts that, in terms of national retailers, he saw more market share coming from Sears than Home Depot. But, he added, “The lion’s share of the market is with the independents, and I think that’s where the opportunity is.” Hull went on to point out all the hardware stores, paint stores, garden centers, flooring and lighting showrooms that still exist.
“In the worst of times, much less-capitalized companies are going to struggle to survive in this environment,” Hull observed. “I think there’s an opportunity for consolidation in local markets.”
Since the downturn started, Lowe’s has been taking a regional approach to merchandising and marketing, emphasizing remodeling project sales where the economy was still healthy and falling back on home maintenance in hard-hit places like California and the upper Midwest. But now that the recession has spread from coast to coast, Lowe’s is broadening this approach.
“Right now we are focused on small projects, on home maintenance and projects customers can do to refresh their homes instead of taking on a large remodeling project,” Stone said last month. “We realize that people are still going to spend money so we have got to make sure that we are ready for that.”
Lowe’s is doing the trowel work when it comes to outdoor living, a solid performer for the company regardless of the economy. The retailer claims to be roughly three percentage points away from being the leading nursery retail destination in the nation. In its last fiscal quarter, which ended on Jan. 30, 2009, only four of Lowe’s products categories showed positive comps; three of them were related to outdoor living. (The fourth, building materials, got a boost from hurricane-related sales.)
Lowe’s is banking its hopes on lawn and garden sales over the next three months. The retailer’s Web site, circulars, even its register tape is pushing the “Welcome Back Spring” advertising campaign.
“Consumers are still spending money,” Stone reported. “While in certain markets, they might put off buying a new fence or riding lawn mower, they’re still buying flowers, shrubs and mulch—the milk and bread of the home improvement industry.”
Lowe’s can’t live on bread alone, however. Like all retailers struggling through the current recession, the company has to figure out a way to drive sales in every category. A tried-and-true strategy—cutting prices—was put into play last September by Home Depot, which lowered prices on 1,200 items throughout the store.
Lowe’s says it has employed a “New Lower Price” program for some time. At any given time, about 2.5% of its SKU mix were marked with the yellow “new lower price” promotional tags, which accounted for 3% of the company’s sales. Lowe’s viewed these items as a driver of small project sales and a way to boost average tickets. In analysts’ conferences, Lowe’s executives have stressed that they did not embark on a “lower price” strategy in reaction to Home Depot’s campaign.
“We have had NLPs [new lower prices] for the last five years, and when the competition did come out with their program, our price shoppers looked at the markets,” Stone said in November. “A few price adjustments were made,” he said, but “[there was] nothing that was out there that we had to overreact to.”
But as the recession drags on, price perception among consumers has taken on a new urgency. Lowe’s “new lower prices” tags can be found throughout the store on a multitude of items: washers, bookcases, copper tubing, circular saws, floor refinishers, insulation, circular saws and ceiling fans, just to name a sampling. Lowes.com also features the yellow tag in banners, boxes and per-item discounts.
And Lowe’s new advertising campaign—the one where clever camera angles add the letter “t” to the end of the store banner—sends an obtuse yet obvious message to consumers: Lowe’s has the “Lowest” prices.
Appeasing the gods
Sixteen months ago, when Stone told a Banc of America analyst gathering, “We cannot afford to sit back and wait for the macro environment or the housing gods to help us,” Lowe’s had already eliminated some of its remerchandising projects for 2008 and downsized its marketing budget. Since then, the company has delayed plans for opening a 14th distribution center, further reduced its advertising spend and allowed more stores to conduct once-a-year inventory checks. (Traditionally, stores do it twice a year.) The company continues to look for ways to cut expenses, such as switching to more modular displays that simplify resets. It is also attaching point-of-purchase materials and signage directly to products.
Managing expenses will only take Lowe’s so far on the balance sheet, however. Lowe’s is determined “to pick up every nickel we can,” Stone said, a reference to sales of smaller home repair items. But Lowe’s hasn’t given up on the big ticket projects, because people are still reroofing their homes and installing new kitchens. To make sure it gets that business, Lowe’s is proceeding with pilot projects that will give the retailer a competitive advantage over roofing wholesalers or kitchen and bath specialty retailers.
“Don’t think that those large tickets, tickets over $500 or $1,000, have completely dried up,” CEO Robert Niblock said at the company’s annual investors conference in September. “If you look at something like building materials, driven by roofing installation, you saw a substantial increase in large ticket purchases in those areas.… There are still customers out there who are putting in new kitchens.”
Lowe’s began testing an in-home selling model in 2007, sending its employees into customers’ homes to measure and bid siding, fencing, roofing or millwork jobs. Lowe’s has also moved into testing a complete kitchen project in one of its markets, selling and installing cabinets, countertops, flooring, lighting and appliances.
Lowe’s is moving ahead with other projects as well. The Charlotte Observer reported in January that the retailer is building a 325,000-sq.-ft. “Planogram” building in the town of Troutman, N.C. A Lowe’s spokesperson told the newspaper that the warehouse-like facility will be used by Lowe’s merchants to evaluate products before they go into stores.
400 Lowe’s corporate positions frozen or left unfilled in 2008.
For revenue, Lowe’s is looking for ways to benefit from the recent stimulus plan. Lowe’s has also been tracking the potential renovation sales attached to foreclosed homes. At Lowe’s last earnings conference on Feb. 20, Bridge ford, who heads the retailer’s business development unit, reported that the post-possession spend on foreclosed houses in Lowe’s markets is similar to what is spent during the “normal” turnover of housing.
PUTTING THE STIMULUS TO WORKThe U.S. Recovery and Reinvestment Act runs for more than 1,000 pages. Somewhere in there lie opportunities for home improvement retailers like Lowe’s, according to Greg Bridgeford, executive VP business development for the Mooresville, N.C.-based retailer.
During the company’s fourth-quarter analyst conference, Bridgeford ticked off the pertinent proposals. The $5 million program to improve the energy efficiency of the modest income homes through weatherization. The $6.3 billion program for energy efficiency improvements in federally supported housing. The $2 billion for the neighborhood stabilization plan. Then the big one: the $8,000 credit for first time home buyers.
“These are all part of the Recovery and Reinvestment Act that we’re analyzing and making sure that we’re available to be there for customers as they take advantage of different parts of the stimulus plan,” he said.
He said the company is exploring ways to help customers take advantage of tax credits for energy-efficient products such as windows, doors, furnaces and insulation, to name a few.
Lowe’s CEO didn’t seem cheered by those numbers, however. After announcing that he was freezing the salaries of senior management in fiscal 2009, as well as reducing raises for all other employees, Niblock told investors that consumers needed more than extra cash in their pockets.
“At some point in time, we’ve got to get employment back [on track] in the country,” Niblock said. “[That will] really be able to drive the turnaround that we would all like to see.”