Lowe’s CEO Marvin Ellison Is Prepared for a Housing Rebound

Marvin Ellison, chairman and chief executive officer of Lowe’s., speaks during the Business Roundtable CEO Workforce Forum in Washington, D.C., on June 17. (Al Drago/Bloomberg)

The home improvement market may be in a slump, but Lowe’s CEO Marvin Ellison isn’t deterred.

Rather than succumb to the market’s pessimism over Americans’ lack of enthusiasm for home renovation, Ellison has been preparing the retail chain for an eventual inflection in demand. That includes insulating Mooresville, N.C.-based Lowe’s from the bite of new tariffs, and expanding the company’s reach into the lucrative professional contractor market. This year alone, Lowe’s announced two acquisitions of companies that cater to the pros worth a combined $10 billion dollars.

Investors believe in Ellison’s vision. Lowe’s stock has gained roughly 170% since he became CEO in July 2018, outperforming the S&P 500’s 132% rise, and rival Home Depot 110% increase, in the same span.

Barron’s spoke with Ellison on Wednesday at the Goldman Sachs Global Retailing Conference in New York City. An edited version of the conversation follows.

Barron’s: You have been leading Lowe’s for seven years. How are you feeling about the business?**

Marvin Ellison: We feel great. I mean, we had a company with a great balance sheet, great front-line associates—but not a great strategy, and not a clearly defined plan for a modern retailer. It has really been about putting together a strong leadership team and providing clarity on where we think the business has to go. We’ve been able to do that in the midst of the most unique economic environment, with the pandemic and then housing being in a little bit of the doldrums for the past three years or so, given elevated interest rates.

Lowe’s delivered a solid second-quarter earnings beat. What are the main drivers of your growth in profitability in an economic environment that is hurting sales?

There are basic things that every successful retailer does well: You have a strong supply chain. You have a modern IT infrastructure. You have a seamless connection between brick and mortar and digital. You have really good tools around assortment planning, inventory management, and payroll allocation. Back in 2018, we had none of those things. We also didn’t have clarity on which customer segments we were serving and how we served them.

But we had a really good balance sheet and a willing group of hardworking associates, which gave us an advantage. So we started to invest. Our philosophy was, is it possible to invest in these retail fundamentals while also managing the business well and rewarding our shareholders? With that, we created clear guidelines on how we allocate capital. The three pillars of the strategy are: Invest in the business, both organic and inorganic; continue to maintain our quarterly dividend and stay in that aristocratic area of dividend payout; and buy back shares.

We invested in the supply chain, and now one of our strongest growth categories is in appliances. We’re the only retailer in the U.S. that can deliver and install an appliance in two days in virtually every ZIP Code in the country. That opened up a world of possibilities, not just for appliances, but for everything big and bulky, giving us the opportunity to efficiently deliver things like patio furniture and grills, and continue to grow share in appliances. That has been a big part of our growth and profitability.

We have also created a culture in which every function in the company is continually looking at ways to drive productivity. We have set a billion-dollar target for this year that we are going to achieve because we have prudently invested in technology, and we have identified ways that we can take out unnecessary costs across store operations, merchandising, and the supply chain.

But most important, we have positioned ourselves so that we are prepared for when the housing recovery happens. The data tell us that by 2033, we’ll need 18 million new homes just to meet current demand. So we know the inflection in housing is coming. We just don’t know when. Our plan has been: Let’s have a strategy so that we are prepared for when it happens, and we can get our percent of that recovery.

Will rate cuts lead to that inflection, as many investors have posited? Or does something else have to happen at a macro level to see that rebound?

We have two views on that because we can’t predict when it is going to happen. One view we’re calling the “lock-in” effect, should we stay in this high-rate environment.

Households have accumulated, on average, roughly $400,000 in equity per household; the total is something around $33 trillion. The lock-in effect is basically: “I have a strong personal balance sheet, I have a lot of equity in my home, but I’m locked into this low mortgage rate and I can’t go anywhere because I don’t want to give it up.”

We are going to reach a point where the customer is going to say, “I’ve got to invest in this home.” They are going to find a way to make that home more accommodating for a growing family, and that may be through a Heloc [home-equity line of credit] or some other financial tool.

At some point that lock-in effect is going to create investment in the home irrespective of rates. But what we are hoping is that you start to see mortgage rates come down. We don’t know what the number is, but if you talk to people in our industry, they think anything that feels like a sub-6% mortgage rate is going to have a psychological effect on people, if nothing else. They are going to feel like maybe this is as good as it is going to get, and you can start to see housing turnover spur again.

We’re prepared to wait it out if the consumer says, “I’m going to stick to this low mortgage rate, but I have to invest in my current home.” We’re positioned for that. But we think the true inflection comes when rates hit a psychological level where people start to spend again.

Lowe’s has been big in the do-it-yourself sector. But the company just acquired two companies serving professional contractors. How is the pivot toward Pro going?

In 2018, about 19% of total revenue came from Pro sales. That is significantly lower than it should be to create balance in the overall sales portfolio. We have been able to get that up to about 30%.

Looking ahead, our objective is: When the housing inflection comes, what parts of the macro will drive that recovery, and are we going to see the prerequisite benefit in our business model? We came to the conclusion there was one glaring void in our business strategy, and that was in single family and multifamily construction.

Candidly, we didn’t have a business model that positioned us to really benefit from that growth. We had shored up our overall retail fundamentals and taken good steps to create market-share growth in that small to medium Pro, but now we felt like in order for us to take advantage of the need for new-home construction, we had to get into this larger Pro spend.

That led to the acquisition of Artisan Design Group, or ADG, which closed in June, and now our desired acquisition of Foundation Building Materials, or FBM. We now have a meaningful opportunity to participate in a $250 billion total addressable market.

Our decision was simply based on a future projection of where the market is going, and where we want to create revenue. This gives us a great opportunity to continue to drive share growth in small to medium Pro and serve our DIY customers well. Concurrently, we have an opportunity to go after this larger Pro, which we think is going to pay off when the housing recovery happens.

How will the tariff landscape change the home improvement market—and Lowe’s?

Near-term, we have seen no meaningful shift in consumer spending patterns. But what we think will be long-lasting is sourcing diversification globally. Roughly 60% of our goods are sourced from the U.S. now. That is a meaningful increase from when I arrived here seven years ago. Roughly 20% is sourced from China, 10% from Mexico, and the remaining 10% is scattered globally across Canada, Southeast Asia, India, etc. We are in the process of trying to derisk our dependency on one country of origin and bring as much to the U.S. as possible.

We are also keen on monitoring the elasticity of our consumer demand, because elasticity is different from appliances to flooring to grills to patio furniture. And irrespective of all of that, the customer still looks for value. So while we’re dealing with cost pressure, we’ve done three things well: We have diversified our sourcing; we work closely with our suppliers to share the burden of the cost increase; and we have looked across our entire portfolio of products and tried to understand what’s the best way, even in this environment, to bring value to our customer. I don’t think that ever changes.

What are other long-term drivers for home improvement that the market hasn’t factored in?

Innovation, like AI, still matters a lot. Home improvement has always been complex in nature. It could be as complicated as, what plant can I put in a shaded area versus an area with sun? Or, what is the right fertilizer or pesticide to use if I have pets? Those are important questions.

We partner with some of the best tech firms in the world— Palantir, OpenAI, Nvidia —and have created this wonderful companion tool for both our associates and our customers that we call Mylow. We’ve combined all of our internal data on training, product knowledge, and videos, and now our customer can go to Lowe’s.com or the Lowe’s app and have AI answer the questions I just posed. Our associates can do the same. It takes a business that has been inherently complex and makes it easier for the customer and easier for us to train and ramp up a new associate.

We also think demographic trends matter. Younger generations want to be homeowners, and how you communicate to those individuals is different. The power of influencers, the power of social connections is greater. We just launched our influencer network, and one of the first people we signed up was Mr. Beast. He has the largest following in the world, and he was eager to join us.

How you communicate is going to change, and how you combine AI in a way that simplifies projects and makes it easier for customers will be an ongoing change.

Thanks, Marvin.

Corrections & Amplifications: Lowe’s announced two deals this year, for a combined $10 billion, of companies that cater to the professional contractor market. An earlier version of the introduction to this interview incorrectly stated that the company had announced two billion-dollar acquisitions of companies that cater to the pros.

Write to Sabrina Escobar at sabrina.escobar@barrons.com