Business

New era begins at Lowe’s as CEO outlines plans for improvement amid mixed results

Lowe’s announced early Monday that it will shut down 20 underperforming stores in the U.S. and 27 in Canada, as well as four specialty facilities regional offices in Canada. None of the affected stores are in the Carolinas.
Lowe’s announced early Monday that it will shut down 20 underperforming stores in the U.S. and 27 in Canada, as well as four specialty facilities regional offices in Canada. None of the affected stores are in the Carolinas. Observer file photo

In the first report of its financial health under a new CEO Wednesday, Mooresville-based Lowe’s laid out a number of initiatives it’s planning to shape up its business, including cutting down on certain slow-moving inventory, selling a California chain it operates and naming another new top executive.

The improvement plans pleased Wall Street: Lowe’s shares soared 8 percent to hit an all-time high Wednesday.

The company’s quarterly report, however, was mixed. The company announced stronger-than-expected second-quarter earnings and revenue, but its same-store sales, a key measure of a retailer’s health, fell short of expectations.

Lowe’s earnings come amid strong reports recently from other retailers, including Target, Kohl’s and Home Depot. Lowe’s CEO Marvin Ellison told the Observer the housing market will continue to provide a tailwind for customers eager to spend on home-improvement projects.

“It’s a very strong endorsement of the consumer. If we look at just the home improvement consumer, all macro indicators are pointing in the right direction,” said Ellison, citing rising home values and strong housing demand.

In a surprising announcement, the Mooresville-based chain said it is exiting its Orchard Supply Hardware business, which the company bought in 2013 for $205 million, in order “focus on its core home improvement business.” Lowe’s said it will close all 99 Orchard Supply Hardware stores — all of which are in California, Oregon and Florida — as well as a distribution center by the end of the year.

In a separate announcement Wednesday, Lowe’s said that CVS Health Chief Financial Officer David Denton will become its new chief financial officer as soon as CVS’ acquisition of Aetna closes later this year.

Lowe’s report Wednesday caps off an eventful past several months for the local home improvement retailer.

Ellison, former CEO of J.C. Penney, took over the top post at Lowe’s in July. He replaced Robert Niblock, who announced his decision to retire in March after 25 years with the company, including about 13 as CEO.

This summer, Ellison announced a major shakeup in Lowe’s executive ranks. A number of positions, including chief operating officer and chief customer officer, were eliminated, and responsibilities formerly under these jobs were assumed by new senior leaders who report directly to Ellison.

Ellison called the new organizational structure “simplified,” and one that will enable faster decision-making at Lowe’s.

The leadership changes come nearly a year after longtime investor hedge fund D.E. Shaw began building up an activist stake in Lowe’s last fall. The firm has been pushing for changes at the retailer, and in January Lowe’s announced three new board members.

“None of these actions are easy to take; however, they are the right decisions for our company and our shareholders, and this will allow us to position our core home improvement business for continued growth,” Ellison said Wednesday in a call with analysts, referring to the slew of changes at Lowe’s.

Mixed results

For the second quarter, Lowe’s said Wednesday that net income was $1.52 billion, up from $1.42 billion in the same quarter a year ago. Lowe’s said that, adjusted for certain items, earnings per share surged 31.8 percent for the quarter to $2.07 a share, topping the forecast of analysts surveyed by Zacks Investment Research by 5 cents.

Sales for the quarter were $20.89 billion, up 7.1 percent from the same period in 2017, and better than the $20.81 billion analysts had forecast. Same-store sales, a key measure of a retailer’s health that refer to sales at stores open at least one year, rose 5.2 percent, below the Wall Street estimate of 5.3 percent.

Looking ahead for the year, Lowe’s said it expects to earn $4.50 to $4.60 per share, which falls short of the guidance of analysts who expected $5.40 to $5.50 per share.

To improve sales, the company will “aggressively rationalize store inventory,” which includes cutting back on lower-performing goods and investing in fast-selling items, Ellison said in a statement. The types of slow-moving products vary store-to-store, Ellison said. In-demand products include those used frequently by professional customers, Lowe’s said, including flooring and tiling.

Ellison also said Lowe’s will work to “create a true expense reduction culture,” meaning it will no longer “throw payroll” at its problems. One measure Ellison specifically outlined is streamlining Lowe’s stores’ engineering processes, including by automating the ways trucks are loaded and unloaded.

“If you simply go in and build engineered processes consistent across all types of stores and volumes, you can drive increased productivity without having any kind of a staff reduction action. It’s just more about process efficiency,” Ellison said.

In a research note, Credit Suisse analyst Seth Sigman lauded Lowe’s improvement plans as “a move in the right direction as the company exits a non-core business line and works to rationalize its core Lowe’s store inventory.”

Lowe’s earnings announcement Wednesday comes on the heels of a strong report last week from its larger rival, Atlanta-based Home Depot.

Last week, Home Depot reported second-quarter earnings that handily exceeded Wall Street expectations, thanks in part to purchases of big-ticket items like appliances. That was a bounce back from the start of the year, when sales lagged as bad weather stalled construction projects. Home Depot said that same-store sales surged 8 percent during the quarter.

The Associated Press contributed.

Katherine Peralta: 704-358-5079, @katieperalta

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