Any time investors get impatient with retailers that are investing in new technology and thereby clipping their short-term profits, I urge them to consider the illustration Lowe’s Cos. provided on Wednesday of how the alternative – under-investment in systems and technology – is actually worse.
In many ways, the home-improvement giant had a solid first quarter, including a 3.5% increase in comparable sales from a year earlier that was built on increased traffic and higher average spending per transaction. Those figures reflect the work new CEO Marvin Ellison has done to try to turn Lowe’s into more than a respectable second-place competitor to Home Depot Inc. And yet the retailer was forced to cut its full-year guidance – a move that has it on track for its worst one-day stock plunge since 1992 – largely because of problems resulting from clunky behind-the-scenes systems that help it set its prices.
What happened, according to Ellison, is this: Essentially, Lowe’s merchandising executives were accepting price increases from vendors on certain items without taking any offsetting action to raise retail prices. There are a number of ways it could have done that; typically, instead of raising retail prices on frequently-bought, highly competitive items, they might raise them in less price-sensitive categories.
None of that ever happened, though, because Lowe’s outdated systems and tools meant that his leaders, many of whom were new to their roles, did not “have a clear line of sight” about the cost increases, Ellison said. They didn’t fully understand the issue until the more expensive goods started hitting shelves, which wasn’t immediate, since goods go to stores on a first-in, first-out basis. The situation contributed to Lowe’s gross margin being squeezed in the quarter to 31.5% from 33.1% in the same period a year ago.
What a mess.
We already knew that Lowe’s was burdened by technology that was far from best-in-class. Executives have said before its merchandising and pricing systems date to the early 2000s, making it practically ancient. Ellison said at a December investor day presentation that his employees are “at a competitive disadvantage with outdated and cumbersome systems.” He pointed to an “embarrassing” website outage on Black Friday as evidence.
But these first-quarter results make clear just how grave the consequences of sticking with inefficient, confusing tools can be. Of course, Ellison is still relatively new to the job, and he clearly gets that. That’s why Lowe’s announced this week it was acquiring a retail analytics tool from Boomerang Commerce.
But investors would do well to keep this grisly stock plunge and guidance cut in mind the next time they cringe at a retailer’s lofty plans to plow money into tech. These somewhat unsexy investments matter immensely.
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Sarah Halzack is a Bloomberg Opinion columnist covering the consumer and retail industries. She was previously a national retail reporter for the Washington Post.
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