Lowe’s Gives Activist More Fuel After Trailing Home Depot Again

(Bloomberg) -- Lowe's Cos., facing mounting pressure from an activist investor after falling further behind Home Depot Inc., debuted a six-point plan to improve operations -- and is stressing a new-found “urgency” to produce results.

With fourth-quarter results missing estimates, Lowe's executives pledged to act quickly to improve their employees' engagement with customers, enhance their product mix and offer speedier deliveries, among other initiatives.

“Let me be clear that our entire leadership team and board are focused on working together to continue to analyze our performance and business expectations, and we are moving forward with urgency to improve our results,” Chief Executive Officer Robert Niblock said Wednesday on a conference call.

But investors were skeptical, pushing the company's shares down the most in two years. The results highlighted activist D.E. Shaw & Co.'s complaints and illustrated the gap between Lowe's and Home Depot, which moved to get employees to spend more time on the sales floor and interacting with customers several years ago.

While Lowe's has seen sales rise as Americans invest more in home improvements after almost a decade of rising property values, it isn't getting as much of a lift as its larger competitor. One reason is that the chain has fewer stores in lucrative areas than Home Depot. Another is that Lowe's spent more on luring customers in with promotions, but then didn't convince enough of them to actually make a purchase.

D.E. Shaw, which has already won three board seats, has said if Lowe's operated as efficiently as Home Depot, its stock could surge. One of the investment fund's director seats is going to David Batchelder, who will join next month. He served a similar role on Home Depot's board last decade on the behalf of a different activist investor.

As scrutiny of Lowe's performance has intensified, Niblock said the company is increasing capital expenditures by about 50 percent this year to $1.7 billion. A chunk of that will go toward the in-store experience, and follows a boost in labor hours last year in an attempt to improve results.

Converting Traffic

“We realized we've got to put more in than just the labor,” Niblock said on the call. “We made the labor investments, and we need to make the incremental investments to ensure that we convert that traffic into transactions.”

The company talked about having its employees spend more time working with customers, and less on other tasks, a move that helped Home Depot improve store productivity when it was implemented.

Lowe's has seen some success with its strategy: Same-store sales rose 4.1 percent in the fourth quarter, topping analysts' 3 percent estimate, according to Consensus Metrix. But Home Depot posted a gain of 7.5 percent, marking the seventh-straight quarter it has outperformed Lowe's.

Lowe's also posted fourth-quarter profit and full-year guidance that missed estimates, as well as a decline in gross margin. The company seeks to rebound by using more data to improve marketing, upgrading its technology and building more online distribution centers, while expanding its relationship with top brands.

Sherwin-Williams

On the last point, Lowe's announced a deal with Sherwin-Williams Co. to make it the exclusive paint supplier for the chain.

Lowe's shares fell as much as 9.4 percent to $86.75 on Wednesday. The stock's value had surged by about 25 percent in the past year through Tuesday's close.

“I do want to reemphasize that we are working with a sense of urgency,” Chief Financial Officer Marshall Croom said.

--With assistance from John J. Edwards III and Brandon Kochkodin

To contact the reporter on this story: Matt Townsend in New York at mtownsend9@bloomberg.net.

To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net, Jonathan Roeder, Lisa Wolfson

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