Jan. 24, 2003 discussion:
Home Depot vs. Lowe's
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GEOFF COLVIN: Well, the Super Bowl of retailing is going on right now, and here's what I mean. Most people know that America's biggest retailer is Wal-Mart, but who's number two? The answer is Home Depot -- bigger than Sears or Target and one of the greatest growth companies ever. But now Home Depot is under attack by a direct competitor with a very different approach, and look at the results: Since the stock market peaked three years ago, Home Depot is down about 60 percent, while the competitor, Lowe's, is up about 50 percent. And suddenly Home Depot versus Lowe's is the rowdiest retailing battle since Macy's versus Gimbels.
Joining us from Scottsdale is Barbara Allen, an analyst with Natexis Bleichroeder, and here in the studio is Pattie Sellers, a senior writer at FORTUNE. Welcome to both of you. Barbara, Home Depot stock has made a lot of people a whole lot of money over the years. It has been the worst-performing stock in the Dow in 2002. What went wrong?
BARBARA ALLEN: I think there are three factors you ought to think about in answering that, and the first one is that previous management apparently seriously underinvested in this company. They didn't have distribution centers, they didn't have appropriate information technology, all those kinds of things that we normally associate nowadays with a sophisticated, high-powered retailer.
The second factor is that the current management has been having some trouble getting traction and understanding what's going on at the company and implementing the correct changes. And that is a challenge that's going to be out there for I think at least the next year or so.
But lastly, as you allude to, Lowe's is just cooking with gas. They've got a really good strategy. They have superb execution. They just do it right. And they have continued to put pressure on Home Depot as they expand across the country. And indeed now Depot stores are overlapped by Lowe's by about 70 percent, in 70 percent of the markets, and so I think what we're seeing here is an increasing distancing of Lowe's away from Home Depot.
COLVIN: Well, these two companies are so extremely different in all kinds of ways, starting with the CEOs. And let's take a look at them, because the CEO of Home Depot is Bob Nardelli, a long-time GE star, just came to Home Depot two years ago. By contrast,Robert Tillman at Lowe's has been with the company 41 years; he started there as a stock boy.
Home Depot's Bob Nardelli earned $6.53 million in 2001, the most recent for which figures are available. Tillman earned almost $5 million less than that.
Nardelli says trust your gut; that's something he learned from Jack Welch at GE. Tillman says listen to the customers, the words of a long-time retailer.
Bob Nardelli is an operations and systems whiz, and that served him extremely well in his years at GE. Tillman (is) a retailing and merchandising expert, a real pure retailer.
Patty, when you look at those comparisons, who does it make you want to bet on?
PATRICIA SELLERS: Right now for the short term, I think I would bet on Bob Tillman. What Bob Nardelli is doing at Home Depot, I believe is the right thing, but this is, I think, at this point a two-year process. As Barbara says, it's at least a year out before they start to show benefits.
You know when Bob Nardelli came in in December of 2000, they were saying this is a two-year process. They're still saying a two-year process. He's doing all the right things. He's investing in systems, he's centralizing merchandising, he's cutting back on the store expansion rate, all these things that need to be done. It (Home Depot) was run like a retailer would run the company. They needed a non- retailer to come in and find out all the stuff that they need to do inside.
ALLEN: Well, I disagree with that. I mean the retailer Bob Tillman has invested very heavily in all the things you're talking about that Home Depot needs
to do now. And I think what Depot is missing -- and that has been demonstrated in the past year where we've gone from a positive 5 percent comp store sales growth in the first quarter to a negative 10 -- is they're missing that connection with the employee on the floor of the store, and of course we don't have the infrastructure in terms of technology to do it.
So I think there's a very real question about whether that connection can be made, but at the very least it is a long-term procedure and process. It took Lowe's several years to turn themselves around when they were surpassed by Home Depot in the early 1990s.
SELLERS: Lowe's has done it. Lowe's has better systems. Lowe's has centralized merchandising. They've been doing the right thing for years. And I believe Nardelli came in and found, you know, it's like right now he is trying to renovate a house and it's kind of a mess, and he's asking the customers to continue coming in while the house is under renovation. And it's not easy to keep them coming in in a situation like that.
COLVIN: Well, that's for sure. Now one of the big differences between these two companies is the approach to women customers. It's an amazing thing. Lowe's has concentrated on women customers; Home Depot has concentrated on men and professional contractors and so forth. Which approach seems to be working better? Patty first, then Barbara.
SELLERS: Home Depot needs to focus on women customers. Lowe's is getting a lot of mileage over that right now. You know, years ago (Home Depot co-founder) Bernie Marcus used to boast about how they didn't focus on women customers. They called the woman the light do-it-yourselfer, the lower margin consumer that they thought by focusing on her they would alienate their professional customer. They missed the boat.
COLVIN: They missed the boat. Barbara, what do you say?
ALLEN: I think that Home Depot should focus on the customer that it's been servicing best and not try to duplicate Lowe's, and this is exactly what Lowe's did when it evaluated its position in the early '90s; (What Lowe's decided) was, you know, "We can't out-Depot Depot. Let's find out what their weaknesses are." And part of that was to go after the higher price point selection, (and go) after, to a certain extent, the woman customer.,/p>
And I think that Depot may end up, if it doesn't continue to serve its current customer base well, they may end up being, you know, irrelevant to either customer.
COLVIN: Isn't there a danger that the country could just get saturated with these stores? I've read some forecasts that say by the end of next year, with these companies expanding at the rates they're going, the country will be saturated. There won't be room for anymore of either one.
ALLEN: Oh, I think that's just quite misstated. You noticed that there wasn't much discussion about saturation when Home Depot was selling at 50-something dollars and other analysts were recommending it. So the market is I believe about $430 billion. It grew over 6 percent in 2002. And even at that level, Lowe's is about 7 percent of the market, Depot's about 14 percent.
I think there's plenty of room for both of them to grow, but right now as an investor we need to be looking at who has the best strategy, the lowest valuation relative to growth, and the best execution. And I say that's Lowe's, and that's why I personally own it. And the only other disclosure I have to make is that we don't have any other, my firm has no other relationships.
COLVIN: You're way ahead of me. That's just what I was going to ask you, Barbara.
ALLEN: And I will be buying it again since the stock price has gone down. I'll be buying it when I'm legally able to do so.
COLVIN: We've got to wrap it up there. Patty, Barbara, thanks so much.
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