Lowe’s (NYSE: LOW) has named current J.C. Penney CEO Marvin Ellison as its new president and chief executive. The move is in line with the chain’s efforts to better serve its customer base.
In this segment from Industry Focus: Consumer Goods, Vincent Shen and Dan Kline how Ellison’s hiring fits the narrative management is trying to weave for investors. Despite the company’s best efforts, however, investors do have another option in this industry in Home Depot (NYSE: HD).
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A full transcript follows the video.
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This video was recorded on May 29, 2018.
Vincent Shen: In terms of big picture takeaway, how bullish are you for the company? Do you think that these various investments that they’re making, these priorities that they’ve set out, do you think that’s enough?
Dan Kline: My opinion on Lowe’s changed very much in the last few quarters. I have a background, my family has a ladder and scaffolding business, so I know some aspect of the contractor world. But I am not handy, as has come up multiple times. And I find shopping at Lowe’s, or Home Depot, torturous. You cannot get someone to pay attention to you. If you don’t know what you’re talking about, there’s no sympathy. So to read, for the past year, that they’re addressing the customer on all different levels, everyone from the me to the contractor who knows exactly what he wants and they don’t necessarily have it — the fact that they’re putting that in, and then they brought in a customer-friendly CEO, that takes this from a company that, I believed in their financials, to a company I actually like. [laughs]
Shen: More of the story overall.
Kline: Yeah! The history of Home Depot and Lowe’s was that they’d come into a market, the local hardware store would go out of business, but the owner and the employees would go work at Home Depot or Lowe’s. So, you’d get that expertise. They’ve really gotten away from that, from that hand-holding customer service.
Now, hopefully, as they implement these things, they’re going to be able to serve me, but they’re also going to be able to serve the contractor that’s smart enough to know that if Lowe’s doesn’t offer him a good price on materials or renting scaffolding, he knows where to go. He knows the little professional guy who can handle that.
To address those things very specifically, that’s a huge market they can open up. The middle was fine. The handy guy, Lowe’s was a candy store. But the contractor who could deal with the professional side, and the guy who’s trying to just do some little home project who knows nothing, those are areas that Ellison’s going to address, and it makes me feel a lot better about the company.
Shen: Sure. In my shoes, I didn’t follow Lowe’s as closely in the past. Reading about this business again, we talked about some of those headline numbers and how strong that is, again, for this kind of business. But I feel like, if you’re considering an investment in Lowe’s, the ultimate question is, do I want shares of Lowe’s, or do I want shares of Home Depot? There’s an inevitable comparison between the two companies.
There are some really important differences to keep in mind. Lowe’s is valued at about 17x forward earnings. Home Depot has a premium to that, where they trade at almost 20x forward earnings. With that three-turn difference in terms of the P/E ratio, you’re getting, in Home Depot, stronger, more consistent revenue growth, stronger comps growth, you’re getting stronger operating margins. On Lowe’s, I think it’s around 9% for the trailing 12 months. For Home Depot, it’s closer to 14% to 15%, and that’s management’s long-term target.
On the Lowe’s side, in terms of the margins, their profitability, we’re expecting to see that go down, at least for this year and maybe next year, given some of these investments that they’re making. And then, even though Lowe’s is a dividend aristocrat — I think they’ve increased their dividend every year for 56 consecutive years, really impressive — Home Depot pays a higher dividend, about a 2.4% yield vs. about 2% for Lowe’s.
So there’s this constant comparison that you have to make if you’re going to buy one of these brick-and-mortar home improvement retailers. The sector is doing really, really well compared to the broad market, retailers in general. But picking which one, you can’t help but make this comparison.
Kline: One, you don’t have to pick one.
Shen: That’s fair.
Kline: You could invest in both of them. I think there’s also some added opportunity out there for these companies. If you look at the shakedown in retail, that if you’re a surviving brick-and-mortar chain — which, obviously, these are going to be surviving chains — they’re also not dependent on mall traffic, they’re stand-alone locations, in most cases. As you see Sears go out, appliances are going to be a growth area. That’s a major category, and it’s one that consumers have shown, over and over again, they want to see and touch it. Almost no one is buying a refrigerator just based on a website.
So, as you see the rest of the retail shakeout — Sam’s Club closing locations is going to kick some sales to Home Depot and Lowe’s — the reality is, it’s going to come down to marketing. How often is the Lowe’s next to the Home Depot? There’s really no reason why you couldn’t go to either one. And I do like what Lowe’s is saying how about how they’re going to reconsider their targeted marketing. Now, I’m sure Home Depot is addressing it as well. But Lowe’s does have a bit of the higher-end brand. It’s a bit of a Target- Walmart situation. They both kind of do the same thing, but Lowe’s has a little more polish, which might help them as they refine how they reach customers.
Shen: Sure. I think you have a company in Home Depot that is firing on all cylinders, doing incredibly well. Again, really popular in the Fool community. Then, on the Lowe’s side, trading at a bit of a discount. Maybe you see more of an upside there as a result, if you believe in these initiatives that they’re investing in — which I do think are the right areas, as we’ve discussed.
Kline: Yeah. I mean, I’d be concerned, over the next six months, to see what happens with the leadership team. What they’ve talked about is that Ellison is going to come in, he’s going to review the plans and put his own touch on it. Sometimes that means everyone leaves, which is not great if you’re in the middle of a reinvigoration plan. So hopefully, Ellison comes in and he plays nicely with others, and he can add his finesse to what already seems like a solid plan.
This doesn’t seem like a case where the previous CEO was pushed out. It does seem like a legitimate retirement. So I’m relatively hopeful. But if I was going to buy stock today, I’d probably wait until Ellison has his first earnings call and actually make sure that he’s going to continue some of these things.
Shen: Essentially, to make sure that you agree with the direction he chooses, whether that’s, I like this plan, let’s stick with it — and frankly, I think it reflects a lot of the changes in the focuses that he’s had at J.C. Penney, as well. It’s not like they’re radically different views.
Kline: I think he’s been picked because he fits this plan. I will point out that I’m very bullish on J.C. Penney, even though I acknowledge that they’re on a tightrope for survival. I do think he’s made mostly the right moves there. At a well-capitalized company, he should really be able to make an impact quickly.
Daniel B. Kline has no position in any of the stocks mentioned. Vincent Shen has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
