Monday, August 17, 2009

Lowes Needs A New Model

Lowes (LOW) reported worse declines than expected. Same store sales are off as the consumer is running scared. The question becomes that of scale. If we are in a prolonged recession, is the company and the industry it competes in structured on the right model. Big box stores need lots of customers. The parking lots are empty. There is a historical bias to open and expand. Here are some structural concerns.

1. If they decide to amputate some stores there will be inventory write downs that will hurt the competition.
2. They will need to amputate/close more than just a few stores.
3. Most of the inventory is commodity price driven. Lumber and metal prices are critical components. Should Lowe’s write down its inventory and structure its balance sheet for the future.

It’s all going to be very different. The old models do not work. Can the board look at a new vision? Same store sales have been declining each quarter for as long as you can remember.