Here at The Motley Fool, we believe individual investors should have the same access to information that Wall Street has. In that spirit, we've listened in on some investment bank conferences with major companies and are giving you the rundown. We call this feature "Fool on the Street."
Strategy vs. execution
Here's a good chicken-or-egg question: What is more important in business -- strategy or execution?
The obvious answer is: both! But I would argue that strategy plays a more important role in some industries. Questions like "Should Apple
In the big-box retail world, history has shown that execution usually wins out over strategy. I recently listened in on Lowe's
Where's the paint?
Big-box retailers offer tens of thousands of products in cavernous stores. At general-merchandise sellers like Wal-Mart
Lowe's attacks this problem in two ways. The first is hiring knowledgeable salespeople, a real challenge when you are opening 150 stores a year. Each store has a sales manager who is responsible for hiring people who know the difference between a locknut and a table saw, and who can guide customers to the right product for their need. This is augmented by continuous product knowledge training programs, and pocket selling guides for instant reference.
The second approach is what Lowe's calls "operation-efficient merchandising." This means making the shopping experience easier through effective signage, product adjacencies, and packaging. This approach to merchandising requires a lot of extra work. Buyers can't just buy the stuff they think will sell best. They have to package and display the product in a way that gives customers the information they need to make a buying decision.
Measure for measure
It's an old retail adage that "what gets measured, gets accomplished." Lowe's takes great care in measuring its operational performance across key selling metrics. The company defines 20 merchandise categories (for example, lumber versus appliances). They measure market share in each merchandise category using four metrics: dollar share, unit share, draw rate (getting people in the store), and close rate (how many of those people actually buy something). For 2007, the company improved market share across all four metrics in 11 of 20 categories.
Lowe's also measures customer satisfaction carefully, using the data to recognize top performers and determine root causes of service failures. Not many retailers are this diligent in applying customer-facing metrics to every aspect of their sales performance. It's this type of attention to detail that separates a great retailer from an also-ran.
The softer side of home improvement
A perpetual question for home-improvement retailers has been "who's the customer?" Is it the soccer mom looking to redecorate a bathroom, or the CBC (commercial business customer) with five roofing jobs next week? The answer has always been: both. But choosing the right orientation makes a big difference.
Lowe's has its traditional roots in selling to homebuilders, but when it reinvented the company in 1989, it decided to focus on making women comfortable shopping in the stores. This means less clutter, more lights in the aisles, softer fixtures, and better point-of-view displays. But the CBC customer is important as well. To find the right mix, company executives are constantly walking their stores and asking how well their offering suits both customers. Current research indicates that 95% of their CBC customers love the stores, but they still have 5% that think the store isn't "rough enough." I guess splinters are a turn-on for some people.
How do you say "belt sander" in Spanish?
Finding 150 traditional sites is becoming more of a challenge as the company gets bigger. Lowe's ended the third quarter of 2006 with 1,330 stores in 49 states. The company is currently targeting 2,000-plus locations in the U.S. and has announced plans to enter Canada and Mexico. The first Canadian stores open at the end of 2007 in Toronto. Mexico is slated for 2009, with the first stores opening in Monterrey. The company sees the potential for about 200 stores in Canada and 40-50 in Mexico. At the current growth rate of approximately 150 stores per year, this translates into six or seven more years of rapid store growth. Beyond that will require more creative thinking about store size (i.e., smaller prototypes) and market cannibalization.
My experience is that successful big-box retailers find ways to keep extending the growth cycle. As evidence of this, note Wal-Mart's push into "Neighborhood Market" formats, 40,000- to 50,000-square-foot stores (one-third the size of a typical Supercenter), with a more limited assortment. The strategy seems to be working well. With smaller stores catering to the impulse-shopping occasion, customers are still able to stock up at the Supercenter on weekends.
Currently, Lowe's management doesn't think a small-store format is in the cards in the foreseeable future. But I like management's attitude toward growth. Management ended the real estate portion of the presentation with the statement "It's not a numbers game; it's a productivity game." I agree. Too many retailers are pursuing growth at any cost.
Not long ago, I listed Lowe's as one of my favorite stock picks for 2007. The stock is selling at an attractive P/E ratio of 16 times trailing-12-month earnings, well below the S&P 500 average. With the real estate market likely to turn around in six to 12 months, and the company's intense focus on superior execution of the basics, Lowe's is well worth your consideration.
For more opinions on Lowe's, check out:
Wal-Mart and Home Depot are both Inside Value recommendations. Could Lowe's be joining the group at some point? To find out, sign up for your free 30-day trial to find out more about what it takes to be a value pick.
Motley Fool contributor Timothy M. Otte surveys the retail scene from Dallas and owns shares in Wal-Mart, but not in any other companies mentioned in this article. He is all thumbs when it comes to fixing things, but he welcomes comments on his articles.
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