In this segment from Motley Fool Money, host Chris Hill and analysts David Kretzmann, Jason Moser, and Aaron Bush discuss the big news in the retail industry: J.C. Penney (NYSE: JCP) CEO Marvin Ellison will be leaving the world of department stores for the land of home improvement, taking the CEO position at Lowe's (NYSE: LOW). The market loves this move for the company, and the guys consider why. They also look at the broader outlook for Lowe's, and the tailwinds likely to propel it from here.
A full transcript follows the video.
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This video was recorded on May 25, 2018.
Chris Hill: We begin with some surprising news from the home improvement industry: Lowe's first quarter report took a backseat to the news that JCPenney CEO Marvin Ellison is leaving JCPenney to take the top spot at Lowe's. Jason, shares of Lowe's up more than 10% this week. And when I look at Marvin Ellison's resume, I understand why there's optimism.
Jason Moser: That guy is grinning so wide, it's like he has a coat hanger in his mouth. I mean, you have to believe he's happy to leave JCPenney behind. I don't know that there's anything that fixes that, to be frank. When we look at Lowe's in this market, the home repair and home renovation market, I've been more of a Home Depot (NYSE: HD) guy, I guess, for the longest time. But I think, actually, that looking out over the next three to five years, Lowe's may represent the better opportunity for investors.
There are a couple of really important catalysts that are coming into play here. One is Mr. Ellison taking that CEO role. The other one is an aging home market here in the United States. We talked about this last week with Home Depot's earnings. When we look at 1995, 33% of the U.S. homes were greater than 40 years old. That number is tracking to hit 54% by 2020. I don't need to connect the dots for you, Chris. You know that aging homes require more work.
Hill: Oh, yeah.
Moser: More upgrading, more maintenance, all sorts of stuff like that. That's good for Home Depot and for Lowe's. Lowe's has always played sort of that Pepsi to Home Depot's Coke. But, I think there's a great opportunity to capture some additional share there with Mr. Ellison taking the role.
David Kretzmann: Yeah. It'll be interesting to see where this goes. I think, over the past five to ten years, Home Depot has regularly traded at a slight premium to Lowe's, and that's because they've been the better operator. Lowe's is a quality operator. For instance, their return on invested capital is around 17%. Home Depot's, though, is almost twice that at 32%. So, Home Depot has that leg up as an operator. It'll be interesting to see if this new CEO maybe can help spur Lowe's to catch up to Home Depot and potentially earn a little bit more of a premium valuation in the process.
Hill: And before he got hired to be JCPenney's CEO, Ellison spent more than a decade in the executive ranks at Home Depot. I have to believe he's going to be bringing some of those best practices to Lowe's.
Moser: I'm certain he will. He has a reputation for being very service-oriented. Two primary points of focus for him will be on that customer service side, as well as digital sales. Right now, Lowe's digital sales don't represent a whole heck of a lot of the business, only about 5%, so he has a great opportunity to grow that piece of the pie in the coming years.
Aaron Bush has no position in any of the stocks mentioned. Chris Hill has no position in any of the stocks mentioned. David Kretzmann owns shares of Home Depot. Jason Moser has no position in any of the stocks mentioned. The Motley Fool has the following options: short September 2018 $180 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Home Depot. The Motley Fool has a disclosure policy.