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STATEWIDE

Retail renovation

Home Depot outperforms Lowe's — except when it comes to CEO pay.
 
by David Mildenberg

When your competition beats you 19 straight times, it’s tough to call it a rivalry. That will be the elephant in the room as stockholders gather for Mooresville-based Lowe’s Cos.’ annual meeting May 30. Ending that losing streak is a key test for Robert Niblock, whose 10th anniversary as CEO of the state’s third-largest public company looms next year.

For 19 consecutive quarters, Atlanta-based The Home Depot Inc. has reported same-store sales have increased at a faster pace than Lowe’s. It’s a reversal from 2004 through late 2008, when Lowe’s had its own 19-quarter streak while Home Depot stumbled under then-CEO Robert Nardelli. Same-store sales, revenue from locations open at least a year, matter because the companies no longer depend on new stores for growth. Lowe’s, which was opening 150 a year in the mid-2000s, has plans for only six in the U.S. this year, plus five in Mexico and four in Canada. Home Depot is opening eight. Together, they have more than 4,000 stores, a majority opened since 2000.

“The downside of the industry’s setup is that you have a very easy comparison between Home Depot and Lowe’s, and either you do better or you don’t,” says Walter Todd, chief investment officer of Greenwood Capital Associates LLC. The Greenwood, S.C., company manages more than $900 million, some in Home Depot shares.

The divergence isn’t just sales. Home Depot earns about 10 cents per dollar of sales before interest and taxes, and that margin may reach 14% within three years, Bank of America Merrill Lynch analysts forecasted in March. Lowe’s operating margins are about 7%, with Niblock pledging to reach almost 10% in 2015.

Home Depot’s success since the economy cratered in 2008 and 2009 reflects its focus on homebuilders and contractors who make up more than a third of the company’s sales. Pros account for about 28% of sales at Lowe’s, which targets retail customers, particularly women, who make the majority of home-improvement decisions. It’s not the hardware store L.S. Lowe opened in North Wilkesboro in 1921 or the business son-in-law Carl Buchan took over in 1946 and built into a 14-store chain before a heart attack killed him at age 44 in 1960 or even the Lowe’s that relied on tradesmen for 60% of sales as recently as 1982.

Since the housing market stabilized in 2011 and 2012, the biggest spenders on hardware and lumber have been builders and renovators working on high-priced homes, says Ken Perkins, president of Retail Metrics Inc., a Swampscott, Mass., company that tracks retail trends. Homes priced between $200,000 and $300,000 have shown little appreciation as income growth has stagnated, dissuading middle-income consumers from starting improvement projects, he says. “During the early 2000s, Lowe’s did a great job renovating their stores and making them customer-friendly. My wife always prefers Lowe’s. But in the process, their pricing drifted a little higher than Home Depot.”

Home Depot also benefited by timing. Nardelli’s tenure as CEO ended in January 2007, prompting a strategy shift just ahead of the worst housing-industry recession in two generations, says Bill Smead, chief executive of Smead Capital Management, a Seattle investment company that owned more than $23 million of the company’s shares in April. During Nardelli’s seven years in the top job, Home Depot shares slipped 8%. The former General Electric Co. executive, lured to the retailer by a compensation plan that netted him more than $200 million, shuffled senior management and consolidated nine regional buying offices into one Atlanta hub. The latter move saved staffing costs and simplified life for shippers but left many stores unprepared to meet customer needs.

When CEO Frank Blake succeeded Nardelli, stores in Phoenix and Miami that had carried the same items as those in Minneapolis and Seattle were revitalized with more local emphasis. “Home Depot had made their mistakes before the meltdown,” Smead says, “and it suckered Lowe’s, which continued to have good results.” Its stock price more than doubled during Nardelli’s reign. “They didn’t think they needed to make adjustments so quickly, which put Home Depot two years ahead of them.” Since the stock market hit bottom in March 2009, Home Depot shares have risen almost 340%, outpacing Lowe’s gain of about 250%.

Given the 19-quarter losing streak, Niblock, 51, will face increased pressure from directors if company results slip this year, says Lawrence Hrebiniak, a management professor at the University of Pennsylvania’s Wharton School. A 1984 UNC Charlotte graduate, Niblock joined Lowe’s in 1993 after working as an accountant for Ernst & Young LLP. He became CEO in 2005 upon the retirement of Bob Tillman, who had worked for the company 42 years, including nine as chief executive.

Lowe’s promoted Michael Jones to chief customer officer, effective April 30, succeeding Greg Bridgeford, a 32-year veteran and the company’s second-highest paid executive the last two years. The ascendancy of Jones, who led the Charlotte-based North Carolina and Latin America divisions of Swedish chainsaw manufacturer Husqvarna Group before joining Lowe’s in 2013 as chief merchandising officer, prompted a Wall Street Journal article in March suggesting some directors were antsy about Niblock’s leadership. No directors were quoted by name, and the company disclosed last month that Niblock received a 55% raise last year. His $18 million pay package is 60% more than the $11 million awarded last year to Home Depot’s Blake.

Niblock’s pay reflects “that our company is currently at an inflection point in successfully executing our long-term strategy,” company spokeswoman Amanda Manna wrote in an email. An improving housing market didn’t hurt, either. Lowe’s 17% gain in operating profit and 5.7% increase in sales in the past year exceeded targets set by its board, contributing to the higher pay, the company reported in a filing. Home Depot’s operating profit increased 18% last year, while sales advanced 5.4%.

The good news for Lowe’s is that the margin in same-store sales compared with Home Depot has narrowed in recent quarters and may tighten more in 2014, says Aram Rubinson, an analyst at New York-based Wolfe Research LLC who rates the stock a buy. “Lowe’s productivity has always been much less than Home Depot, but right now they are not losing ground at an unforgiveable rate.” Lowe’s sales grew at a faster pace than the overall retail market during the first quarter for the first time in 3½ years, showing the company retained customers by offering competitive prices and keeping advertised items in stock. That reverses a problem last year when Lowe’s out-of-stocks occurred at five times the pace of Home Depot’s. “They may be gaining a little swagger,” he says.