Did Lowe's Just Pick Low-Hanging Fruit or a Bad Apple?

Local hardware store chain Orchard Supply Hardware (NASDAQOTH: OSHWQ  ) was operating behind the eight ball from the beginning, so its Chapter 11 bankruptcy filing this morning isn't much of a surprise.

Following its spin-off from Sears Holding (NASDAQ: SHLD  ) less than two years ago, not only did it have to contend with a heavy debt burden that it was saddled with by its former parent, but it had to make significant dividend payments to Sears all the while it was operating as a housing-oriented retailer focused on the California market. 

I'll admit to thinking that once Orchard Supply was spun off, it would do better, free of its chains to Sears, as it were. But the hooks were still in too deep and it was ultimately unable to effectively compete.

Lowe's (NYSE: LOW  ) , though, could be the big winner here, stepping in as a "stalking horse" bidder and setting the floor for any subsequent bids Orchard Supply may get. It's offered to pay $205 million for the hardware store chain, as well as take over payables for all of its suppliers, just as California's housing market turns on the afterburners. Median home sale prices in the state surged more than 22% year over year in April followed by a 26% spike in May. Lowe's will be acquiring a retailer that will feature a much lower cost structure after its debt is shed in bankruptcy, allowing it to capitalize on the new housing boom.

Yet even with lower costs, Lowe's isn't guaranteed a successful outcome. Efforts at trying to hoodwink the public into believing a large national operation is still a small, hometown chain isn't anything new.

In addition to Orchard Supply, Sears also spun off its home appliances, hardware, tool, and lawn and garden equipment retailer Sears Hometown & Outlet Stores. It reported fiscal first-quarter sales dropping 3% earlier this month as comps fell 5%. Sounds a lot like the "progress" its former parent routinely achieves.

Home Depot (NYSE: HD  ) also tried its hand at the smaller footprint store. Having run all the mom-and-pop stores out of town after it would move one of its big orange boxes in, Home Depot met with disastrous results with its Villager's Hardware concept in the 1990s when it tried to re-create that local feel. And this was during some booming economic times, too.

But the acquisition does give Lowe's the chance to challenge Home Depot in certain areas that it can easily move into, notably certain urban centers that might be prohibitively expensive to construct new Lowe's stores. 

With the big-box retailer retaining the Orchard Supply name and management team, it's clear it doesn't think the concept was a bad one, just that it had been set up for failure. That should be a key indicator that this wasn't a bad apple that will spoil Lowe's entire barrel but rather some low-hanging fruit on which it can gorge itself.

Solid companies selling at depressed prices have consistently helped generations of the world's most successful investors preserve capital, minimize risk, and achieve long-term, market-trampling returns. For one such company, read our free report: "The One REMARKABLE Stock to Own Now." Just click here to get started.



Read/Post Comments (1) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 18, 2013, at 2:35 PM, dapperone wrote:

    This is a smart business move by Lowe's. They are gaining a very substantial market presence in California quite cheaply. OSH has suffered against HD in recent years because they don't offer one-stop home improvement shopping. Lowes could change that. Many OSH stores are located in shopping centers with contiguous surrounding businesses. Lowes has the financial resources to buy out surrounding business leases and create much larger home improvement stores, at much lower cost than it would take to create a Lowe's from scratch. In addition, the OSH name carries with it a reputation for superior customer service and superior merchandise compared to HD.

Add your comment.

DocumentId: 2494334, ~/Articles/ArticleHandler.aspx, 4/18/2014 11:07:42 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement