Retail Winners & Losers: The Finance Professor

Curbing Expansion/Managing Contraction

Since 2003, retail and restaurant companies were expanding rapidly within the U.S. As more houses were built, more strip and shopping malls sprang up. These malls were filled with retailers and eateries. Furthermore, retailers catering to home renovation repair and remodeling

Simply put, we were saturated with retailers in this country. The economy was not big enough for Best Buy and Circuit City, or Bed Bath and Beyond(BBBY) and Linens 'n' Things, or Dick's Sporting Goods(DKS) and some small regional competitors.

In restaurants, McDonald's(MCD) and Yum! Brands(YUM) focused on overseas expansion. Ruby Tuesday(RT) managed its way back from trouble by eliminating expensive leases and underperforming units over the course of the recession. Home improvement retailer Lowe's the home improvement retailer continued to expand in an already saturated market, while Home Depot focused on building up its distribution network rather than its installed store base.

Lowe's vs. Home Depot

I just mentioned how Lowe's and Home Depot took different approaches to managing the recession. Home Depot appears to have succeeded, while Lowe's is stumbling. On RealMoney Silver, I compared several metrics for these two companies per their second-quarter earnings reports and conference calls.

Home Depot vs. Lowe's Source: LakeView Asset Management

As you can see, while both companies had some difficulties operating in the challenging environment, if you go down the list, metric by metric, Home Depot stands head and shoulders above Lowe's.

What accounts for these discrepancies? Here are three factors that come to mind:

1. Home Depot is focusing on international expansion and domestic rationalization, while Lowe's is still focused on domestic expansion in a contracting home-remodeling market.
2. Lowe's has always been seen as better from the perspective of appearance and its appeal to women. That also gave Lowe's the perception of being more upscale than Home Depot. In this economy, upscale just does not work. Home Depot could be a trade-down beneficiary.
3. Lowe's got stuck with too much inventory. Home Depot can better manage its inventory and is investing in a better distribution network.

>To order reprints of this article, click here: Reprints