Lowes CEO Robert Niblock says the companys proposed acquisition of a West Coast hardware chain would give the company a much-needed boost in the improving California market.
Lowes announced plans on Monday to purchase Orchard Supply Hardware for $205 million in cash. Lowes offer stands as the starting bid for an auction of the assets of Orchard Supply, which filed for Chapter 11 bankruptcy protection on Monday. Should no competitor outbid Lowes by at least $12 million, the Mooresville-based company would acquire Orchard Supply.
Lowes said Orchard Supply would continue to operate as a standalone business. Lowes plans to acquire at least 60 of the 91 Orchard Supply stores, which are primarily located in densely populated metro areas.
Orchard Supply, a Sears spinoff, specializes in paint, repair and backyard goods and its stores are typically smaller than a Lowes. The average Orchard Supply includes around 36,000 square feet of selling space, while the average Lowes has 113,000 square feet of selling space.
The smaller store size offers entry for Lowes into high-traffic California locations where real estate price and lack of space have limited the traditional big-box store, Niblock told the Observer in an interview.
Lowes, the nations second-largest home improvement retailer, currently operates 110 stores in California. Those stores have done well, Niblock said, but the chain needed a bigger California footprint to capitalize on that states housing recovery.
Lowes saw its sales drop in the first quarter while they rose at Atlanta-based Home Depot, its No. 1 rival. Niblock has said Home Depots edge in the California market, where it operates 232 stores, helped the company outperform Lowes this spring.
The West Coast saw comparatively better weather this spring, and Home Depots position in California allowed it to reap the benefits, Niblock said.
David Strasser, an analyst for Janney Montgomery Scott LLC, said the deal to acquire Orchard Supply is a low-risk way for Lowes to broaden its footprint in California.
This transaction is both a smart and modest capital investment to attack a critical real estate shortcoming that Lowes has relative to Home Depot, he said in a research note.
Niblock said he sees signs of recovery in the housing market both nationally and in California. He said home values are heading in the right direction and that hes noticed an increase in home construction.
Homeowners are starting to feel better and taking on smaller projects again, he said. From a psychological standpoint, thats a good sign.
Lowes expects the deal with Orchard Supply to be complete within three months. Orchard Supply, which generated revenue of $657 million in fiscal 2012, listed total liabilities of $480.1 million and total assets of $441 million.
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