Lowe’s (NYSE:LOW) seems open to acquisitions to expand its presence in international markets where it still lags way behind its bigger competitor Home Depot (NYSE:HD). When recently asked whether the company would be interested in buying its Canadian competitor Rona, particularly its big-box stores, CFO Robert Hull said that Lowe’s was open to “all options” including Rona, if the latter expressed interest. The news of Lowe’s interest sent Rona ‘s shares up by 12% on Tuesday but the shares retreated after Rona declined any interest of sale. Lowe’s also recently bought online home-goods chain ATG Stores.
Lowe’s International Footprint Smaller Compared to Home Depot
There is significant opportunity for big box home improvement retailers in the attractive international markets, and currently Home Depot is way ahead of Lowe’s in terms of expansion outside the U.S.
By the end of 2010, Home Depot had 179 stores in Canada 93 stores in Mexico and China combined, which together generated revenues of around $7.5 billion. In comparison, Lowe’s has only 24 stores in Canada and 2 in Mexico. It thus needs to invest significant resources before it can come close to Home Depot’s scale outside the U.S.
Lowe’s Sees Opportunity For 100 Stores in Canada, Rona Fits Well
Lowe’s sees the opportunity for over 100 home improvement stores in Canada, compared to the existing 31 stores, which are mostly located in Ontario. With its strong footprint in Quebec, a market where Lowe’s has minimal presence, Canadian home improvement retailer Rona makes a strong case for a potential take-over target. Together, Lowe’s and Rona could pose better competition to Home Depot’s significant presence in Canada. Rona currently operates 21 big box stores in Ontario, 15 in Western Canada and 22 in Quebec.
Lowe’s plans to pursue one-third of its organic store growth over the next five years in Canada and Mexico. It previously planned to open 25 to 30 new stores in fiscal 2011, approximately one-quarter of which would have been in Canada. In contrast, the store count declined by 4 last year and Lowe’s now expects to open just 10 stores in fiscal 2012. Given this slow pace of organic store growth, it would make sense for Lowe’s to look for inorganic expansion outside the U.S. through acquisitions, and Rona seems to be a worthy option.
Rona’s Multiple Store Formats An Issue
So far, Rona’s wide array of stores, ranging from small shops to superstores, has been a key stumbling block for Lowe’s in acquiring Rona, which holds 25% market share in Canada. It currently operates a network around 700 multiple-sized stores in Canada and is now trying to focus more on small stores and e-commerce, while closing its big-box outlets amid financial woes.
If Lowe’s were to buy some of Rona’s stores, particularly big box outlets, it might help both retailers improve their performance. Rona might also be interested in selling its non-Quebec big-box stores to Lowe’s, although Lowe’s would want to get access to Quebec market if it were to buy Rona stores. Meanwhile, Lowe’s could also be interested in trying out some “alternative format” stores in Canada, like Rona’s.
We have a $31 Trefis price estimate for Lowe’s stock, almost in line with the current market price.