Lowe’s Look North Was the Right Course

But now, LOW has to head back to the drawing board

   
Lowe’s Look North Was the Right Course

If it seems like home improvement retailer Lowe’s (NYSE:LOW) always is in the shadow of big-brother rival Home Depot (NYSE:HD), that’s probably because, well … it is.

Lowe’s attempt to expand into the Canadian market through a purchase of north-of-the-border rival Rona Inc. was an attempt to widen its audience and market further up North America. Good idea, but Rona management — not to mention the Canadian government — didn’t want anything to do with the deal.

On Monday, Lowe’s withdrew its offer, originally delivered to Rona management in August, with an accompanying stinging rebuke aimed at Rona’s board of directors, which states in part:

“Lowe’s continues to believe that a combination of Lowe’s and RONA makes business sense and would create significant value for all stakeholders. It is unfortunate that the RONA Board of Directors did not recognize the important economic and commercial benefits of this proposal for its stakeholders and for Canada. Lowe’s remains committed to the Canadian market and will continue delivering outstanding home improvement products and services to its Canadian customers.”

Touche! Unfortunately, though, the press release won’t feed the bulldog that is Lowe’s growth.

And therein lies the problem for Mooresville, N.C.-based Lowe’s: how to expand into a market largely run by its biggest competitor, Home Depot, and a market that is slowly getting back on its feet.

Already dwarfed in sheer size — Home Depot is worth $90 billion by market cap and brings in $71 billion in revenue, vs. LOW’s $34 billion and $50 billion — Lowe’s also is playing in HD’s growth shadows. Home Depot has improved annual earnings 60% since 2010, while Lowe’s has advanced by merely 20%. That latter figure has come on less-than-stellar 7% revenue growth, with flat FY 2013 expectations to boot.

Clearly, growth is scarce, so Lowe’s looked north.

Lowe’s opened for business in Canada back in 2007, and currently operates 31 stores there. Like many others — including Nordstrom (NYSE:JWN) and Target (NYSE:TGT) — U.S. companies are trying to make inroads to Canada, citing stronger currency exchange rates and lower real estate prices for retailers as compelling reasons to expand.

Thus, the effort to purchase Rona made perfect sense, and perhaps shareholders of Rona — who have seen their share price slide nearly 20% during the last month — will regret the decision to spurn the offer.

In the meantime, Lowe’s will have to go back to the draftboard to compete with it’s bigger, stronger brother in Atlanta.

Of course, LOW will keep trying to get those consumers; while the Canadian strategy evolves, the company will focus on expanding into metropolitan markets with populations of more than 500,000 people. To date, however, the company hasn’t released any data on the number of stores planned.

On the share side of things, the game’s not wholly lopsided. Lowe’s is fairly priced at 19 times earnings (HD trades at 21), and its 16-cent quarterly dividend is good for a 2.2% yield, slightly better than Home Depot, too.

Lowe’s was sitting on nearly $1.3 billion in cash and generating more than $1.5 billion in cash flow at its February 2012 year-end. A dividend payout ratio of only 38% leaves some room for dividend growth, and as the economy (fingers crossed) — and more importantly, housing — continue to inch forward, consumers and builders will find their way back into home improvement stores.

That might not be as many customers as Home Depot for now, but Lowe’s will get its share.

Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2012/09/lowes-look-north-was-the-right-course-low-hd/.

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