DRIP PORTFOLIO
A Conversation With Lowe's

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By George Runkle (TMF Runkle)

ATLANTA, GA (Jan. 31, 2000) -- As I promised, I finally got in touch with Lowe's (NYSE: LOW) after a couple of weeks of telephone tag. The person I spoke to asked not to be identified by name, so I'll respect that in this column. Probably the most interesting result of the conversation was that it confirmed much of what you all said to me about Lowe's in your e-mail.

First off, the market for home improvement is "fragmented yet growing." While Lowe's acknowledges Home Depot (NYSE: HD) and Menard's as strong competitors, they do not feel these are their main competitors. Their primary competition is stores like Sears (NYSE: S) and Best Buy (NYSE: BBY) for appliances, the "Mom and Pop" lumber yards, and specialty stores.

Lowe's research indicates that women drive home improvement decisions. So, the company has geared their stores to be more friendly to women shoppers. The stores are better lit, the aisles are wider, and they are neater and cleaner than Home Depot, according to Lowe's. As a result, over 50% of their shoppers are female, and to further meet this market, they are aiming toward home decor. This confirms many of your observations in the e-mail that you sent me (good call!).

Lowe's is constructing bigger stores than Home Depot -- on the order of 121,000 square feet, with a larger garden area and parking lot. They want their parking lots to be able to handle weekend and holiday traffic adequately. While they offer similar products as Home Depot does, they carry different brands.

One area that they are different from Home Depot is in the sales of appliances. They have been selling appliances for years, and are #3 in the country in appliance sales. They carry a full offering of brand names, and carry much of them in stock. This allows the home owner to purchase the appliance and carry it home if he or she wishes. Because of this, they have a large amount of their floor space allotted to appliances.

We got into a discussion about where they have been and where they are going. Lowe's was faced with the task of completely changing their format and keeping the old chain alive while building a new one. This is no small challenge; note that some stores like Hechinger's failed in accomplishing this (Hechinger's went bankrupt). In doing this, Lowe's had to develop their own pipeline of people to staff the stores for expansion. It's not like there were a number of businesses in existence that run these types of stores before.

Getting into the present, this year the chain opened 91 new stores, of which 31 were relocations of existing smaller stores. The base of their stores has been smaller and in middle markets, but they are moving into major metro markets. Seventy percent of their square footage is less than four years old, and their large store base is less than three years old. They do about $32 million in business per store vs. Home Depot's $43 million, however they feel that this is because Home Depot has more of a presence in bigger metropolitan areas. They feel that their sales per store are going to increase from their expansion, and they don't know what the possible peak is per store.

We discussed their margins. The company has 32 contractor sales yards, which are low margin, and actually lower Lowe's gross margin about 35 basis points (a basis point is 0.01%). The appliance sales carry low margins, and have a 40 to 45 basis-point impact. Electronic sales are also low margin, and have a 15-point impact -- they are getting out of this segment for that reason.

I asked them if they planned to sell over the Internet, and the answer was "yes." This will occur in the first half of this year, and will be on a business-to-business basis at first. For example, a remodeling contractor will be able to compose his or her order on Lowe's website, and arrange for delivery to a job site on a certain date. This is much more efficient than phone ordering or faxing. It allows the contractor to see the prices and the bottom line as the order is made out, there is no waiting for a salesperson, and the order can be composed at any time. They will sell to consumers where the sales "make sense."

They see a lot of expansion opportunities into the major metropolitan areas. Next year they are constructing 95 stores, of which 25 will be relocations of existing stores. In 2001 they project construction of 125 stores, of which 15 will be relocations. They feel they have developed their model enough that they don't need to experiment with different concepts, although they are open to changes. In retail, of course, nothing stays static, as the Hall of Failed Retailers can attest to. Lowe's feels confident in 20% growth per year in sales and 22% - 23% earnings-per-share growth in upcoming years.

This wraps up our series on Lowe's and Home Depot. Next week, I want to get back to Pathfinder companies, and we'll take a look at a company that's been in the news lately for some interesting innovations. To discuss today's column and the companies in it, please visit the Drip Companies message board linked below.

Drip Portfolio

1/31/00 Closing Numbers
Ticker Company Dly Pr Chg Price
CPBCAMPBELL SOUP7/8$31.44
INTCINTEL CORP15/16$98.94
JNJJOHNSON & JOHNSON9/16$86.06
MELMELLON FINANCIAL CORP7/8$34.31

  Day Week Month Year
To Date
Since
7/28/97
Annualized
Drip 4.61% 4.61% 5.56% 5.56% 37.14% 13.39%
S&P 500 2.52% 2.52% -5.09% -5.09% 48.54% 17.05%
S&P 500(DA) 2.52% 2.52% -5.09% -5.09% 51.16% 17.87%
S&P 500(DCA) n/a n/a n/a n/a 24.18% 9.00%
NASDAQ 1.37% 1.37% -3.17% -3.17% 151.04% 44.23%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
9/8/9722.9799INTC45.635$98.94116.80%
11/14/9711.811JNJ80.721$86.066.62%
11/5/9828.3741MEL34.416$34.31-0.30%
4/13/988.174CPB54.586$31.44-42.41%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
9/8/9722.9799INTC$1,048.68$2,273.57$1,224.89
11/14/9711.811JNJ$953.39$1,016.48$63.09
11/5/9828.3741MEL$976.51$973.59($2.93)
4/13/988.174CPB$446.18$256.97($189.21)
  Cash: $24.38  
  Total: $4,544.99  


Key
• S&P 500 (DA) = dividend adjusted. Dividends have been added to the total return of the index.

Note
Drip Port launched with $500 on July 28, 1997, adds $100 to invest every month, and the goal is to own $150,000 in stock by August of the year 2017. Due to the slow nature of dollar-cost-averaging and our relatively significant starting costs, we do not expect to seriously challenge the S&P 500 for the first three to five years as we build an investment base. The long-term advantages of dollar-cost-averaging still overcome the short-term disadvantages, however. Final note: our investment in Campbell Soup is frozen due to fees instituted in its investment plan. Click here for a history of all Drip Port transactions.