A warning from Wall Street: What's next? - Brief Article

Home Channel News, Nov 6, 2000 by Scott Larson

Like just about anyone even remotely connected to the home improvement industry, I watched with considerable interest last month as Wall Street pounded Lowe's and Home Depot for warning of disappointing third-quarter results.

After all, it's not often that an industry juggernaut such as Home Depot sees its stock price drop 29 percent in one day, a plunge that dragged down the entire market and sent the Dow Jones Industrial Average to its fifth-worst decline ever.

The retailers, of course, have responded with calming words, or at least plausible explanations. A softening economy, falling lumber prices, soaring fuel costs -- even a spike in last year's revenues due to consumers panicky about Y2K -- all contributed to higher operating expenses, lower earnings and slower-than-expected increases in same-store sales. With a shrug, it seemed the companies assured the world that the results were more aberration than trend.

Still, one has to wonder what really lies ahead. For the past decade the two companies have been in a store-opening scramble that has left the country dotted in orange and blue and investors spoiled by quarter after quarter of record results. There were always untapped markets to enter, new competitors to dispatch and, all the while, growth was a given.

Now what?

How many more communities can sustain one, or more likely, two 100,000-square-foot home improvement warehouses? How long until the drive to "fill in" with additional units results in overstoring and very real cannibalization of existing stores' sales? Were the last three months an early warning that such erosion has already begun?

More important, perhaps: From where will the next quantum leap in sales come?

Clearly, Home Depot has taken several significant steps toward an answer or, actually, answers. With Expo Design Centers in full rollout mode, Villager's Hardware concept well into its testing phase and the slow process of learning international markets and Internet and mail-order retailing underway, the retailer is positioning itself to at least have alternatives.

The picture at Lowe's, at least from an outside vantage point, is less clear. Still scrambling to fully integrate its acquisition of Eagle Hardware & Garden of almost two years ago, the retailer has less room to maneuver when it comes to investment resources, and, except for its fledgling Internet efforts and rumors of a Villager's-like convenience hardware concept in the works, no obvious missionary efforts are underway.

Given Wall Street's reaction to recent results, it might be time to start.