Common Stocks and Common Sense by Edgar Wachenheim III

Author:Edgar Wachenheim, III
Language: eng
Format: epub
ISBN: 9781119259930
Publisher: Wiley
Published: 2016-03-23T00:00:00+00:00

NOTE

1 Warren Buffett, Berkshire Hathaway Inc. 2007 annual report, p. 9.

9

LOWE’S

Lowe’s is the second-largest home improvement retailer. Through about 1,850 stores spread throughout the United States and Canada, Lowe’s sells roughly 40,000 house-related items, including lumber, wallboard, flooring, appliances, kitchen and bathroom cabinets, plumbing fixtures, lighting fixtures, paint, power tools, outdoor furniture, grass seed, plants, and fertilizer. The company’s sales volumes closely track with the strength of the housing industry.

Lowe’s was founded in 1921 when Lucius S. Lowe opened a hardware store in North Wilkesboro, North Carolina. After Lucius Lowe died in 1940, the store was owned and operated by several family members, and especially by Carl Buchan, a son-in-law. In the 1950s, Buchan opened several new stores that sold building supplies as well as hardware. Buchan died suddenly in 1960. Robert Strickland, the new CEO, took the company public in 1961 and continued to expand its footprint. Lowe’s revenues increased from $25 million in 1960, to more than $150 million in 1970, and to nearly $900 million in 1980.

Historically, Lowe’s had concentrated on selling to the professional builder. But when the market for new houses weakened in 1980, the company started redesigning its stores to appeal to the do-it-yourself homeowner. At about that time, a new competitor, The Home Depot, started opening big-box warehouse stores that typically were five times larger than the stores operated by Lowe’s. By 1989, it was clear that Home Depot’s large store format was the way of the future. Lowe’s took an impairment charge in 1991 to close smaller stores—and management then started aggressively opening big-box stores to compete with Home Depot. In 1993 alone, Lowe’s nearly doubled its floor space by opening 57 new stores, each averaging close to 100,000 square feet in size. The race with Home Depot was on.

In 1993,1 Lowe’s had revenues of $4.54 billion and Home Depot had revenues of $9.24 billion. Over the next 10 years, Lowe’s revenues increased at a 21 percent average annual rate to $30.84 billion and Home Depot’s revenues increased at a similar rate. Both companies grew rapidly at the expense of small building supply and hardware stores. Small stores simply could not compete with the purchasing powers, distribution efficiencies, merchandise varieties, efficiencies of scale, and low real estate costs enjoyed by the two big-box retailers.

Lowe’s prospered during the 2001–2005 period. The company not only benefited from the boom in housing, but also from taking market share from Home Depot, which was suffering from some self-inflicted merchandising problems. During the five-year period that ended on January 31, 2006, Lowe’s sales per store (comps) increased at a 5.4 percent average annual rate, while Home Depot’s comps only increased at a 2.5 percent average rate. Lowe’s was flying high. The company’s earnings climbed from $0.53 per share in 2000 to $1.73 per share in 2005. And the price of its shares increased 150 percent during the five-year period, hitting $34.85 in late 2005. Lowe’s shareholders were smiling.

Then, the housing boom turned into a bust. In the three-year period 2007 to 2009, Lowe’s comps declined by an aggregate of 17.

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