2 Challenges and Opportunities Awaiting Lowe's Next CEO

MarketsMotley Fool

When Robert Niblock took the CEO position with Lowe's (NYSE: LOW) in Jan. 2005, the company had reported net sales of $36.5 billion for the previous year, and its stock price was about $28 after adjusting for stock splits. Since that time, the company's sales have exploded to $68.6 billion, and its stock price has more than tripled to almost $88 -- a performance which easily trounced the S&P 500 index during that same period.

The problem facing both Niblock and Lowe's investors is that the company's stock, while beating the market, has seriously lagged that of its major home-improvement rival, Home Depot (NYSE: HD). Over the last three years, this pecking order has been exacerbated: Lowe's has trailed not only Home Depot but also the broad market. It is this relative underperformance that undoubtedly led to Niblock's announcement late last month that he would soon step down from his role, once the company finds a suitable replacement. The news comes just months after Lowe's former COO Rick Damron announced his retirement from the company.

Continue Reading Below

While Lowe's investors certainly don't have much to complain about from Niblock's tenure, it's only natural to look forward to his replacement. Let's take a closer look at two of the challenges -- and opportunities -- awaiting the next Lowe's chief.

The RONA integration

In early 2016, Lowe's acquired RONA, a Canadian-based home improvement retailer, for about $2.3 billion. While the integration of RONA under Lowe's larger corporate umbrella is going fairly well, it has pressured the company's operating margin in recent quarters. Given that the company reported a decline in gross margin in its fourth quarter and expects operating margin to be down and gross margin flat in the coming year, investors weren't thrilled that RONA was still dragging margins down more than a year after the acquisition was completed.

Still, it doesn't seem like it will take much to turn this headwind into a tailwind. For starters, Lowe's is busy rolling out appliances, a huge category for the company, to its RONA locations. It has also begun converting some big-box RONA locations into Lowe's stores. These efforts have already yielded results, and the company expects the RONA locations to continue to improve. During the 2017 fourth-quarter conference call, Niblock said:

Later in the same conference call, COO Richard Maltsbarger added that RONA was never supposed to drive operating margin in 2017 but that in the coming year, investors could expect to see "significant movement on the operating margin" from RONA.

Investments in the company's technology infrastructure

In Lowe's fourth quarter, the company reported a 28% increase in online sales growth. Maltsbarger attributed this growth to an optimized mobile experience, including better touch-screen displays, improved product recommendations, refined search algorithms, and better communication capabilities for online customer service.

The company is also pushing its MyLowe's platform to drive customer loyalty. Maltsbarger said that MyLowe's members spend about 35% more than nonmembers, a significant difference. One initiative Maltsbarger highlighted was giving U.S. military veterans a chance to register through the platform, a much easier way for active-duty service members and veterans to prove their service and receive a 10% discount while shopping at Lowe's. In 2017, Lowe's added more than 4.5 million new members to the platform.

While the jury is still out on whether these improvements will drive further online growth, one thing that can't be denied is that Lowe's significantly trails its major rival in this department. In 2016, Lowe's stated that online sales represented 3.5% of its total, and it hasn't updated that number since. Home Depot's online sales account for 6.7% of that company's total sales.

In its last conference call, Lowe's management acknowledged it had a lot of work to do on the marketing front, to make better use of the data it collects on its customers. This is an area where its rival excels: Home Depot collected 1.7 trillion data points on the 50 million U.S. households that had shopped there over the past year.

A full plate for the incoming CEO

The next Lowe's CEO will obviously have to ensure that the integration of RONA continues according to schedule, but it looks like the wheels are already in motion to turn this acquisition into a real driver of profitable growth. Also, if Lowe's is to better compete, it has to use the data it collects on its customers and raise online sales by improving its omnichannel retail experience.

The execution of these initiatives by the next CEO should result in significant value being unlocked for shareholders. While the challenges are real, the opportunities are there as well.

10 stocks we like better than Lowe'sWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Lowe's wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of April 2, 2018

Matthew Cochrane owns shares of Home Depot. The Motley Fool has the following options: short May 2018 $175 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Home Depot and Lowe's. The Motley Fool has a disclosure policy.