Lowe’s Is Latest U.S. Retailer To Misread Canada

Lowe’s is looking to simplify. The home improvement retailer earlier this month disclosed that it has entered into a definitive agreement to sell its Canadian operations to the private equity firm Sycamore Partners for $400 million in cash and future performance-based considerations.

The retailer operates stores in Canada under its namesake banner as well as RONA, Réno-Dépôt and Dick’s Lumber. It serves roughly 450 corporate and independent affiliate locations in the country. The deal with Sycamore Partners is expected to close early next year.

In an online discussion last week, some of the experts on the RetailWire BrainTrust saw the company taking a big but necessary hit.

“It’s the right move, but a huge hit in terms of dollars,” wrote Verlin Youd, SVP, Americas at Ariadne. “Lowe’s bought RONA for $2.4 billion in 2016 under a different CEO and largely different management team and is now selling it for $0.4 billion. With the Home Depot success, and market domination in most of Canada, someone should be able to figure out how to position a real competitor.”

But doing as Mr. Youd suggested could require some serious strategizing. Some BrainTrust members pointed out that U.S. retailers consistently make missteps north of the border.

“Canada has a terrific policy of requiring stores in Canada to sell a certain percentage of Canadian made products,” wrote DeAnn Campbell, chief strategy officer at Hoobil8. “Most large U.S. retailers don’t have a solid procurement network build up to source good Canadian made products, don’t understand Canadian tastes and preferences, and haven’t figured out their customs and taxation strategies to affordably ship products across the border. They go in with high expectations, scramble to source Canadian made products as an afterthought and struggle with setting price points that customers will accept yet still cover the added expense of taxes. This was Target’sTGT
problem exactly, and they left a bad taste behind for Canadian shoppers.”

“Lowe’s Canadian business was reasonable, but its potential was somewhat limited by tough competition and a failure to adapt to the Canadian market,” wrote Neil Saunders, managing director at GlobalData. “It always felt like it was just a bolt-on to the U.S. division rather than having its own identity. Selling it will generate some cash which can be used to bolster the U.S. business, especially in terms of initiatives to build share with professionals.”

“The sale of our Canadian retail business is an important step toward simplifying the Lowe’s business model,” Marvin Ellison, Lowe’s chairman, president and CEO, said in a statement. “While this business represents approximately seven percent of our full year 2022 sales outlook, it also represents approximately 60 basis points of dilution on our full year 2022 operating margin outlook.”

Lowe’s CEO said the deal with Sycamore would “intensify” the retailer’s focus on improving its operating margin and return on investment capital. He said that it would also strengthen Lowe’s ability to gain market share in the U.S. and create greater shareholder value.

“It certainly seems that divesting its Canadian operations will have an immediate impact on margins, and doing so will definitely help simplify operations,” wrote Dave Bruno, director of retail market insights at AptosAPTOS
. “I’m not clear yet, however, as to how they will gain market share. There is no direct line relationship between simplified operations and increased share, but perhaps the shuffling of executive roles and reporting structures that continue apace at headquarters will begin to make an impact on market share and shareholder value soon.”

The home improvement retailer in September parted ways with chief brand and marketing officer Marisa Thalberg as part of a corporate reorganization. Lowe’s did away with Ms. Thalberg’s role and brought its marketing team under Bill Boltz, executive vice president of merchandising. Jen Wilson, senior VP, brand and customer marketing was promoted to senior VP, enterprise brand and marketing, reporting directly to Mr. Boltz. Mike Shady, senior vice president of online, who previously reported to Mr. Boltz, now reports to Seemantini Godbole, Lowe’s chief digital and information officer.

RetailWire BrainTrust member Brandon Rael, strategy & operations delivery leader, did see simplification as a market-building move for Lowe’s, but still anticipated the chain facing a tough time stateside.

“Optimizing, simplifying, and rationalizing store fleets will positively impact Lowe’s goals of improving its operating margins, gaining market share and creating greater shareholder value,” wrote Mr. Rael. “However, there is a greater challenge in the U.S. market as Lowe’s has underperformed relative to their main competitor, Home Depot, and significant economic headwinds will significantly impact their sales performance.”

Canada-based BrainTrust member Kevin Graff, president of Graff Retail, said Lowe’s Canada had not performed that poorly, all things considered. But he saw the chain’s former Canadian wing being set up for a rough time under new ownership.

“I can count on one hand (don’t even need all my fingers) situations where a private equity sale actually works out well,” wrote Mr. Graff. “I’m not throwing mud at Sycamore Partners, but my bet would be that this won’t have a happy ending for staff or customers in the months and years ahead.”

If that were to leave an eventual gap in the market, some were not counting Lowe’s out of Canada in the long run.

“Lowe’s is smart to pull back and rethink — giving them the opportunity to come back in the future,” wrote Ms. Campbell.