Lowe’s Companies, Inc. (LOW), The Home Depot, Inc. (HD): Home Improvement Retail RIP

Running on empty? Osh…

Ever pressed the limit of your gas supply and lost? Then you know just how Orchard Supply Hardware Stores Corp (NASDAQ:OSH) must be feeling right about now. Curiously appropriate symbol, that. Here we are at the start of Home Improvement Retail’s best season, and Orchard, desperate for cash and sales, appears to be running out of everything except merchandise. Dwindling cash, out of time, out of sales, out of credit, coasting into the gas station, (I mean prime selling season) out of momentum. After picking Orchard to lag the market months ago, I recently closed the pick in CAPS at $1.72, a new 52 week low because I won’t get much more mileage out of it.

Customers walk with their cash if you don’t measure up.

I am not an investor in Retailers, but in the interests of real full disclosure, my son works for The Home Depot, Inc. (NYSE:HD) so I watch the “ground game” of these retailers with interest. As a dedicated Do it Yourselfer (DIYer) I am a frequent customer of many hardware and supply stores. So I pay close attention to who has what, the service—when I NEED service, and how efficient in/out works when I don’t need service. The Home Depot, Inc. (NYSE:HD) has the edge in every store I’ve visited. Lowe’s Companies, Inc. (NYSE:LOW) remains a distant second or third. Orchard has an uphill struggle to impress customers. This is a major win/lose factor for investors to understand—the right treatment and right merchandise gets the right customers, and their cash.

Osh.. are they out of time and out of luck?

Orchard Supply and Hardware doesn’t really fit head to head with these competitors, and it doesn’t really fit with the very fine Nursery/Garden Retail competitors in my area. They are a little of both. That could be why it’s struggling. Expanding into the face of declining retail sales is not an easy strategy, but Orchard is doing exactly that, planning to open 3 new stores in the Portland area in the next few weeks/months. That could be a struggle too. Unfortunately, they are late, with one store about to open and the others several weeks (or months) away even as spring has accelerated in Oregon. Late, that could be why they are struggling. Or, ineffective and inefficient management unable to execute could be the struggle. Orchard’s balance sheet looks poor– nearly out of cash, they have “renegotiated” some of their debt and credit lines, a significant sign of desperation. This can’t go on much longer. Then there is the whole story of their spin-off from Sears; the largest shareholder, Lampert, maneuvering to reduce his common share exposure as the stock price sinks steadily.

Competition with Home Depot or Lowe’s is risky

The Home Depot, Inc. (NYSE:HD) and Lowe’s Companies, Inc. (NYSE:LOW) are a rough neighborhood to move into. They serve homeowners, dedicated DIY customers, and Contractors (Pros) of various sizes. Orchard is much smaller, with sinking sales at about 660 million, down 15 million year over year with no earnings. Lowe’s Companies, Inc. (NYSE:LOW) and Home Depot are about 100 times larger, at 50 billion and 74 billion (yes that’s Billion with a B). A retail investor’s delight, The Home Depot, Inc. (NYSE:HD)Earnings Per Share (EPS) is up 10.45% over 5 years and is priced about a 24 P/E with a 2.1% yield after surviving the worst conditions for home retailers I can recall. Home Depot and Lowe’s often go head to head with stores located close to each other. A pair, one The Home Depot, Inc. (NYSE:HD) and one Lowe’s Companies, Inc. (NYSE:LOW) near my home are adjacent and you can drive or walk 50 yards from one lot to the other. It’s hard to imagine Orchard breaking into that duopoly. If Orchard expects to play in this league, even as a bit player in specialty areas, it needs more cash, better sales, and a unique proposition.

One quick way to measure retailing talent

One measure of retailing effectiveness is annual inventory turnover, because it gives you a sense of how effective a business might be in moving merchandise relative to its resources. The Home Depot, Inc. (NYSE:HD) leads the pack at 4.6, Lowe’s Companies, Inc. (NYSE:LOW) a respectable 3.9 and Orchard a dismal 2.6, likely shrinking with their declining sales.The Home Depot, Inc. (NYSE:HD) and v were busy turning those inventories for the past 4 weeks as I and other homeowners put a patch of dry spring to good use. Lots of customers in the stores I visited. Orchard is still a few days from opening their first store in the area as of April 15- about 2 weeks late I assume.

It’s hard to see how Orchard survives in this scenario- ten days late, ten dollars short…Osh__.

The article Home Improvement Retail RIP originally appeared on Fool.com and is written by Charlie Wagner.

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