CEO Chat: Lowe's Marvin Ellison

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The vast majority of our survey respondents are telling us that the home now will always have some element of home office. It always has some element of homeschool, and it always has some element of recreation and entertainment just because of what we all have learned and experienced the last 16+ months.

Welcome to the Barron Streetwise Podcast. I'm Jack Howe. The voice you just heard, that's Marvin Ellison. He's the CEO of home improvement retailer Lowe's. We spoke recently about inflation and shortages and the home improvement boom and whether it will continue after the pandemic is gone and workers return to their offices. This is the second episode in a series of quick chats I recently had with top chiefs. We'll do about a half dozen of these episodes. They'll be short, but we'll publish two a week instead of our usual one. On Tuesdays and Fridays. It's like buy one, get one free, except the first one is also free. And we'll be back with regular episodes later in July. On to Lowe's. Marvin Ellison has been CEO of Lowe's for 3 years. During that time, he's modernized the company's supply chain and e-commerce site and remodeled its stores, and as a result, Lowe's has been gaining on rival Home Depot. Lowe's same-store sales jumped 26% during the year ended January versus 20% for Home Depot. And that helped land Marvin a spot in our recent Top CEOs issue of Barron's Magazine. Marvin says he's proud of the job Lowe's did for its workers during the pandemic.

I've always felt that companies, especially retailers, are really all about people. You know my background. I started out as a part-time hourly employee in college making $4.35 an hour. And you can oftentimes forget the impact of those on the front lines. And during the pandemic, you know, like most companies, we had protocols and procedures and playbooks for a lot of different natural disasters, but we didn't have a global pandemic. So we had to literally learn as we went along. But the one thing that we agreed to from the very beginning is that we were going to focus on the safety of our associates and our customers because we knew we had to be open because of just the products and services we offer. But we also wanted to find a way to financially support our most vulnerable associates. And those were those hourly associates, a lot like I was many, many years ago. We spent almost $1 billion in special bonuses, incentive pay, and other types of financial incentives just to make sure that they had a sense of security during a very, very difficult financial time for most of their households.

I would imagine that early in the pandemic, you had a rush of people who were buying emergency supplies. Somewhere along the line, a home improvement boom broke out. And was there a moment when you realized, hey, wait a second, they're not just running over here to try to find hand cleaner, they're redoing their bathrooms? Was there a moment that told you that interest in home projects was really kicking off?

Yeah, you know, we were watching the business and like everyone, we believe we were walking right into a pretty devastating downturn or possibility of one. And to your point, and we start to see the business shift. And when you start to see things like tankless water heaters and you start to see things like major appliances just start to sell aggressively. And then when you start to see things like grills and patio furniture, you start to get a sense there's something unique and different that's going on. So as we start to survey customers to understand what was driving the trends, you're hearing things like, we need a tankless water heater because for the first time since we bought this house, everyone's at home at the same time all the time, and we need to save energy, but also to be able to keep the water hot for all the different uses that we're seeing that we typically don't see 7 days a week. When you start to talk to customers about patio furniture and gardening, they would say things like, I'm getting stir crazy. I need to get outside and sit. And so I needed some better patio furniture, so I bought a grill. And then as people started to turn their homes into homeschools, into home offices, and as their number one location for recreation and entertainment, we started to see other trends emerge around repurposing of space.

So what happens then? I suspect I'll go back to our offices full-time around Labor Day. That seems to be— there's a growing consensus about Labor Day for office workers. So then what happens after Labor Day? Does that— once people are no longer seeing their home all the time and thinking about it all the time, does that become a headwind for the home improvement business, or does the business sort of Has it shifted up to a higher level where it can then resume growth from there? What do you think happens?

It's a great question. And what I'll tell you is pre-COVID, the housing sector for home improvement, I have to provide that caveat, was very strong. What tends to drive the home improvement business oftentimes is a little different than what drives new home construction and other segments within housing. As an example, there are a couple of macro indicators that are very positive for home improvement and they drive incremental investments, things like home price appreciation going up. That's what we're seeing now, really to a historic level, a shortage of new homes on the market and the aging of existing homes. So if you take just those three, Factors. Those 3 factors existed pre-COVID, and they've only been accelerated now that we're hopefully continuing to trend out of COVID If your existing home continues to appreciate in value, that gives you confidence to make investments in that home. It gives you confidence to put in the granite countertop, to put in hardwood flooring, to build that deck, to do those things because you believe that you're going to get that investment back from a return perspective. In addition to that, two-thirds of our business is repair and maintenance. So as homes become older, you're going to have to fix the leaking roof. You're going to have to replace that water heater. You're going to have to upgrade that powder room. You're going to have to replace those major appliances. And so we believe that that trend is going to continue. And as devastating as this whole pandemic has been on the economy, when you look at savings rates, when you look at the balance sheet of homeowners, it's actually in really good shape versus what it was coming into COVID. And so because of that, we believe that the consumer is healthy from a financial perspective.

Your stock has outperformed over the past couple years the shares of your biggest rival. I'm sure you've noticed. Seems to be investors saying that you are closing in on them or improving relative to them, however you want to put it. Can you tell me about a couple of initiatives or ways that Lowe's has been putting together some improved operating performance that, that might be helping to drive that stock price?

Sure. So one of the first things that I observed coming in almost now 3 years is that we had not made the necessary investments to make Lowe's a modern retailer. And again, I go back to what I just said. The definition of a modern retailer is you have created pathways, processes, and you've created ways for customers to shop any way they choose. You're not dictating to the customer how they shop. You're instead allowing the customer to choose. But whatever pathway they choose, you eliminate friction points. So it's seamless, it's effortless, and the customer comes back for a second, third, and fourth occasion. And so, you know, when you look back at where we were 3 years ago, where we had a dot-com digital site on a 10-year-old infrastructure, where we were project managing complex installations for customers on whiteboards and binders, how we had no mobile technology in the hands of our associates in the stores. Our supply chain was very prehistoric, and all deliveries originated and were facilitated by our stores and not any type of a market network. We had a long ways to go to really live up to serving customers the way they choose to shop. So we've made investments, you know, moving our e-commerce platform to the cloud, building a market-based supply chain model, putting over 100,000 mobile devices in our stores and remodeling our stores from the kitchen departments to the flooring departments to do wayfair signing, new front-end systems, et cetera. And putting in best-in-class project management software. So all of those things enable us to meet the demand that occurred during COVID and it allowed us to do it in a more profitable manner than what we had done in the past. You're going to see us be a lot more aggressive in decor-related areas. You're going to see us be a lot more aggressive in serving our professional customers. You're going to see us invest a lot in how we can have a more seamless and higher-end installation process, whether it's kitchens, bathrooms, flooring, roofs, etc., and do it in a way that we can return value to our shareholders by having the right systems infrastructure and strategy that we can drive profitability as well as driving revenue on the top line. And so we're going to continue to do that. And we think that will allow us hopefully to continue to have a great place for people to work, but also to continue to return value to our shareholders.

I want to ask you, we've all seen the wild ride in the price of lumber, and we've heard about shortages in certain goods. What effect has this kind of supply chain mayhem that's going on had on your business? How have you dealt with that? And also, if I could ask you to tell me what are like a category or two or geography or two where you feel particularly excited about the growth opportunity going forward? That's a triple pileup on that question right there.

Well, here's what I'll tell you. You know, the inflation in lumber, copper, and other commodity categories, it's been challenging. It's been something that we've had to manage real time, and we've been able to do that. You know, when I arrived 3 years ago, we didn't even have the systems or the infrastructure to manage anything as complex as this. But now we've set up a pricing team or a project management office inside the company that does nothing but manage our commodity pricing, ensuring that we're working closely with our suppliers so that we can ensure that we are supporting each other as we both are dealing with the dynamics of this environment. And I feel great about how well we've been able to manage it and serve customers. You know, when I think about kind of what we're looking at in categories that I'm excited about, I mean, we remain really excited truly about just core home improvement, even though we are expanding, you know, to this total home strategy. I mean, there are areas of our business that remains really strong. Major appliances is incredibly strong. We look at outdoor power equipment. I mean, we feel excited about our ability to launch a brand called EGO, and that allows us to give our consumers a great high-functioning brand, but it allows us to protect the environment, you know, by giving them something, uh, that's battery operated, a full battery platform that gives them the power of a fossil fuel type of a device, but it gives them something that's really environmentally friendly. And that's something that we're real proud of, you know. And as we think about this whole global supply chain, you know, COVID reminded all of us that even these suppliers who are U.S.-based are still getting pieces and parts from Mexico, from Asia, and other places. And that is easily disrupted by some of the challenges we've been facing due to COVID. But I feel really good about the fact that we're slowly but surely getting back to a more normal global supply chain environment. And you're going to see us, like other companies, continue to make sure that we have a very broad portfolio of countries that we source from so we're not so dependent on certain countries so that we can have disruptions in our business if something goes bad from a geopolitical perspective or something goes bad from a health and safety perspective. And look, I would just say I'm really proud of a couple of things. When I arrived roughly 3 years ago, we did not have great diversity on our leadership team. And when I look at my executive leadership team now, I think over 40% of the team is made up of people of color and over 40% is women. And to me, that's a great representation of what our customers look like. But I'm also proud of the fact that, you know, we are a company truly focused on trying to provide a great place for people to work. And we've invested roughly $1.4 billion in hourly investments for wage benefits and other enhancements on pay over the last 2 years. And that's something we're going to continue to do. And as I said earlier, I mean, we listen intently to the customer and we are really focused on trying to be a customer-centric company. We think if we do those things well over the long term, we're going to continue to take market share and hopefully we'll continue to add value to our shareholders.

Thank you for listening. Jackson Cantrell is our producer. He didn't get any airtime this episode. Jackson, is there anything you'd like to say now?

Bye.

I was gonna say buy gold. I don't know why that popped into my head. I gotta stop watching those infomercials. Consider gold carefully before buying. Subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen to podcasts. If you listen on Apple, write us a review. If you want to find out about new stories and new podcast episodes, you can follow me on Twitter. That's @JackHough. H-O-U-G-H. See you next week. Wait, see you later this week.

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