Lowe’s Feeling the Pinch of a Slowing Economy

Lowe’s Cos. (LOW) Jim: Buy Mike: Don’t buy

Mike: I don’t know about you, Jim, but I’ve noticed around Southern California that there’s a new store anchoring a lot of these new malls: Lowe’s home improvement stores.

I think of stores like Lowe’s and Home Depot as lumberyards with a college education.

Jim: You know, this might be a knock on any other company, but Lowe’s is almost a Home Depot wannabe.

Mike: Almost? That’s exactly what Lowe’s is.

Jim: All right. To its credit, Lowe’s has done a pretty good job of it. Lowe’s has been spending billions of dollars to remake itself, with more spending to come. This company has gone from being a small chain of modest hardware stores to becoming another big-box retailer like Home Depot.

Mike: I believe Lowe’s got its start as North Wilkesboro Hardware in North Wilkesboro, N.C., in 1921, and that’s where it still makes its headquarters.

Jim: But Lowe’s now has almost 640 stores in 40 states, including more than 20 stores in California. The company made a big expansion step here when it bought an outfit called Eagle Hardware.

Mike: A big step, or a misstep? The integration of Eagle hasn’t entirely gone as well as Lowe’s anticipated, although in part that’s because the consumer market has turned down.

Jim: You’ve hit on the biggest concern right now at Lowe’s--and at Home Depot too. There has been a considerable slowdown in consumer spending in general, and it’s definitely showing up in terms of how much money people are willing to spend at stores like these.

Lowe’s announced in mid-December that its fourth-quarter earnings and its 2001 results would be lower than expected because of disappointing sales. Home Depot had announced its own profit shortfall two months earlier.

I think this is a sign of how sharp the U.S. economic slowdown may be. It’s one thing when people stop shopping at Tiffany or Williams-Sonoma, and quite another when they start cutting back at Lowe’s and Home Depot.

Mike: You know, when we talked about Home Depot in this column in 1999, one of our conclusions was that, assuming an economic slowdown eventually arrived, people would continue shopping at places such as Home Depot because their prices were so good, and because Americans like to improve their homes. But clearly even these chains are being hurt.

Even so, I think sales at companies such as Lowe’s will hold up better than sales at many other retailers.

Jim: Sounds as though you’re recommending this stock.

Mike: Don’t put words in my mouth.

Jim: You’re not?

Mike: Not at this time.

Jim: That’s interesting. I would buy Lowe’s.

Mike: Buy Lowe’s and . . . what? Sell high?

Jim: Very amusing. What you’ve got here is a well-run outfit that’s doing much more than aping Home Depot. The way Lowe’s manages its business stands out.

The stock has been beaten down this year for a number of reasons, including concerns about the company’s expansion, the integration of Eagle Hardware and now the economic slowdown. At $44.50 as of Friday, the stock is down 34% from its peak in April.

So now Lowe’s shares are trading for about 21 times expected earnings per share for the current fiscal year, which ends this month. I think now is a good time to get in for a long-term investment in a solid operation.

Mike: I agree that this is a pretty sound company. But I’ll point out that, though Lowe’s has made much of the idea that it distinguishes itself from Home Depot by having a different brand selection, I’ve been in both stores and for my money they’re pretty much indistinguishable.

Jim: I can’t disagree.

Mike: I do think Lowe’s has succeeded in becoming and solidifying its position as the No. 2 big-box home improvement chain.

Jim: Then what’s the problem?

Mike: The problem is timing. I don’t think investors are going to be ready to bid aggressively for Lowe’s shares for another six months.

Jim: Why not?

Mike: As long as we’re in an economic slowdown the market isn’t going to be interested in retailers. I think these shares will be a good buy eventually. It’s just a little too early to get in.

Jim: Well, I’ll just mention another reason I like this stock: the way Lowe’s profit margin keeps going up. A decade ago it was earning about 2.5 cents on each sales dollar. That number has gone up every year, and the company now is earning about 4.5 cents on the dollar, which is quite commendable.

So even if we’re six months early, I’d still buy the stock.

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Write or e-mail with a stock you would like to see discussed in this column. Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Hiltzik (michael

.hiltzik@latimes.com) covers technology and entertainment and is the author of the book “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age” (HarperBusiness). Either can also be reached at Business Section, 202 W. 1st St., Los Angeles, CA 90012.

You can hear a preview of Peltz and Hiltzik’s weekly column Mondays on the KFWB-Los Angeles Times Noon Business Hour on KFWB-AM (980).