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2 Challenges and Opportunities Awaiting Lowe's Next CEO

By Matthew Cochrane - Apr 8, 2018 at 9:03AM

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With smart execution of a strategic plan, a new CEO can turn some of the biggest tasks facing the company into significant rewards for shareholders.

When Robert Niblock took the CEO position with Lowe's ( LOW -0.85% ) in Jan. 2005, the company had reported net sales of $36.5 billion for the previous year, and its stock price was about $28 after adjusting for stock splits. Since that time, the company's sales have exploded to $68.6 billion, and its stock price has more than tripled to almost $88 -- a performance which easily trounced the S&P 500 index during that same period.

The problem facing both Niblock and Lowe's investors is that the company's stock, while beating the market, has seriously lagged that of its major home-improvement rival, Home Depot ( HD -0.34% ). Over the last three years, this pecking order has been exacerbated: Lowe's has trailed not only Home Depot but also the broad market. It is this relative underperformance that undoubtedly led to Niblock's announcement late last month that he would soon step down from his role, once the company finds a suitable replacement. The news comes just months after Lowe's former COO Rick Damron announced his retirement from the company.

HD Chart

Data by YCharts.

While Lowe's investors certainly don't have much to complain about from Niblock's tenure, it's only natural to look forward to his replacement. Let's take a closer look at two of the challenges -- and opportunities -- awaiting the next Lowe's chief.

The RONA integration

In early 2016, Lowe's acquired RONA, a Canadian-based home improvement retailer, for about $2.3 billion. While the integration of RONA under Lowe's larger corporate umbrella is going fairly well, it has pressured the company's operating margin in recent quarters. Given that the company reported a decline in gross margin in its fourth quarter and expects operating margin to be down and gross margin flat in the coming year, investors weren't thrilled that RONA was still dragging margins down more than a year after the acquisition was completed.

Still, it doesn't seem like it will take much to turn this headwind into a tailwind. For starters, Lowe's is busy rolling out appliances, a huge category for the company, to its RONA locations. It has also begun converting some big-box RONA locations into Lowe's stores. These efforts have already yielded results, and the company expects the RONA locations to continue to improve. During the 2017 fourth-quarter conference call, Niblock said:

We've made significant process integrating RONA, delivering double-digit online sales growth, rolling out appliances to approximately 100 locations, completing five RONA big-box conversions, driving strong growth in our affiliated dealer business, and further optimizing shared supplier partnerships and procurement efforts. We're pleased with the strong momentum we've built throughout the year, culminating in RONA posting its highest comp in 13 years. We believe that we're well positioned for continued growth and remain on track to double operating profitability in Canada by 2021.

Later in the same conference call, COO Richard Maltsbarger added that RONA was never supposed to drive operating margin in 2017 but that in the coming year, investors could expect to see "significant movement on the operating margin" from RONA.

A Lowe's storefront

The next Lowe's CEO will have to invest heavily in technology infrastructure to keep up with the company's chief rival, Home Depot. Image source: Lowe's Companies, Inc.

Investments in the company's technology infrastructure

In Lowe's fourth quarter, the company reported a 28% increase in online sales growth. Maltsbarger attributed this growth to an optimized mobile experience, including better touch-screen displays, improved product recommendations, refined search algorithms, and better communication capabilities for online customer service.

The company is also pushing its MyLowe's platform to drive customer loyalty. Maltsbarger said that MyLowe's members spend about 35% more than nonmembers, a significant difference. One initiative Maltsbarger highlighted was giving U.S. military veterans a chance to register through the platform, a much easier way for active-duty service members and veterans to prove their service and receive a 10% discount while shopping at Lowe's. In 2017, Lowe's added more than 4.5 million new members to the platform.

While the jury is still out on whether these improvements will drive further online growth, one thing that can't be denied is that Lowe's significantly trails its major rival in this department. In 2016, Lowe's stated that online sales represented 3.5% of its total, and it hasn't updated that number since. Home Depot's online sales account for 6.7% of that company's total sales.

In its last conference call, Lowe's management acknowledged it had a lot of work to do on the marketing front, to make better use of the data it collects on its customers. This is an area where its rival excels: Home Depot collected 1.7 trillion data points on the 50 million U.S. households that had shopped there over the past year.

A full plate for the incoming CEO

The next Lowe's CEO will obviously have to ensure that the integration of RONA continues according to schedule, but it looks like the wheels are already in motion to turn this acquisition into a real driver of profitable growth. Also, if Lowe's is to better compete, it has to use the data it collects on its customers and raise online sales by improving its omnichannel retail experience.

The execution of these initiatives by the next CEO should result in significant value being unlocked for shareholders. While the challenges are real, the opportunities are there as well.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Lowe's Companies, Inc. Stock Quote
Lowe's Companies, Inc.
$248.25 (-0.85%) $-2.13
The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
$406.40 (-0.34%) $-1.37

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