A Sharper Edge At Lowe's
By many benchmarks, including sales, gross margins, and profits, Bob Nardelli did a fairly good job at Home Depot (HD ). Don't be surprised if his successor has a hard time measuring up to the same financial standards. The next leader of America's biggest home improvement store faces a deteriorating housing market. And the new honcho will have to execute just as Home Depot's archrival Lowe's Companies (LOW ) ramps up its assault on the Atlanta company's bread-and-butter business.
Despite the continued weakness in the homebuilding market and a 7% decline in its once-gravity-defying share price in 2006, Lowe's Chief Executive Robert A. Niblock, is forging ahead. The Mooresville (N.C.) company wants to open 155 stores this year, on top of 155 in '06, bringing its total close to 1,500. (Home Depot now has 1,854 stores in the U.S., and several hundred more abroad.) And Lowe's is targeting big markets, particularly cities in the Northeast, Florida, and California, traditional bastions of strength for Home Depot. A key metric is the companies' sales per square foot; Lowe's total is about $100 less than Home Depot precisely because it has yet to saturate those lucrative markets packed with boomers who have money to spend on their aging homes.
"We're investing now, and we'll be well-positioned for the future," said Niblock, 44, in an interview on Jan. 3, the day of Nardelli's resignation. He professed little interest in the shifts taking place at his rival. "The fact that there's a change in leadership won't have any impact at all on how we take care of our customers," said Niblock, who took the helm in 2005.
Lowe's already enjoys a far better reputation. It has consistently won plaudits for having a more appealing store design--especially from women shoppers. According to the 2005 American Customer Satisfaction Index, Home Depot ranked worst among specialty retailers, while Lowe's satisfaction rating was second only to Costco (COST ). (In 2001, as Nardelli's tenure began, Lowe's and Home Depot were tied.) That's the competitive advantage Niblock expects to wield as Lowe's moves more directly onto Home Depot turf.
Home Depot's tumultuous year, capped by Nardelli's exit, gives Lowe's an enticing opportunity to make good on its plans. In 2006 two other top executives left Home Depot. With Nardelli gone, the management team is suddenly inexperienced and not very deep. Lowe's, by contrast, has what Citigroup (C ) analyst Deborah Weinswig considers one of the most well-established and vibrant executive suites in retailing. "I think this announcement may give them additional opportunity," says Weinswig, who rates Lowe's her top stock for 2007. "You'll have enough management turmoil and people taking their eye off the ball" at Home Depot.
That's not to say Home Depot's outlook is bleak. The company's stock, stagnant during Nardelli's six-year reign, has long been considered undervalued on Wall Street. Shares rose 2.3% on Jan. 3, to their highest level since May, on the news of Nardelli's departure. Ivan Feinseth, managing director at Matrix USA, has "strong buy" ratings for both Home Depot and Lowe's. But he's markedly more enthusiastic about Lowe's. "The difference is customer service, experience, and product offerings," he says.
By Brian Hindo and Nanette Byrnes