Value Line Publishing analyst, Carrie Galeotafiore had followed the retail building-supply industry for approximately three years. Within a week the investment-survey firm will be publishing Galeotafiore’s quarterly findings on the industry along with the five-year financial forecast for the industry’s leaders, Home Depot and Lowe’s.
In an effort to increase their top and bottom-lines, Home Depot and Lowe’s have implemented strategies like improving customer service, attracting professional customers, and introducing a more favorable merchandise mix. Combined sales from the two companies accounted for more than a third of the industry’s sales. In the mean time, smaller hardware stores struggled to remain in the game. Galeotafiore reports shows confidence in the methods Home Depot deployed to achieve their goals and attributed Lowe’s margin expansion to their thrust into the major metropolitan markets.
This case will mainly focus on the strategic issues involved with Home Depot and Lowe’s, the industry trends, the financial outlook for the respective companies, and whether or not Galeotafiore has the depth of knowledge and experience to make a correct call on the companies’ performance.Finally, the report will be substantiated with financial ratios comparing one company with the other, showing possible alternatives and proposing recommendations.
This segment will narrow down the major issues of the case, along with the quantitative perspective showing historical trends and the projected level of economic activity. In 2001, the Economist Intelligenc Unit (EIU) estimated the retail building-supply industry to be approximately $175 billion with stores similar to Home Depot and Lowe’s capturing one third of the 51% of sales in their category. Despite the slump in the economy in 2001, growth was at 4.2% which representd a decline from 7.7% in 1998. Strategic issues for Home Depot and Lowe’s
Home Depot’s CEO, Bob Nardelli’s goal was to increase their margin through declining cost in product review, opening more tool-rental centers and improving purchasing aspects. All of the above were an effort to remain competitive. Galeotafiore stated in her report that stores which provide programs similar to the Service Performance Improvement offered by Home Depot tend to fear better in operating margins, inventory turnover and productivity, than the do-it-yourself establishments. Jefferies’ analyst Donald Trott downgraded Lowe’s, due to a declining housing-market bubble and, based on an opinion that their stock price was richly valued compared to Home Depot’s. However, on the brighter side, Lowe’s management told analysts that over the next two years, it expected to maintain sales growth between 18% and 19% and over the next three years from 2002 to 2004 it is expected to open 123, 130 and 140 stores respectively entering metropolitan markets with populations over 500,000 like the Boston and New York markets.