No, Lowe’s Canadian odyssey was not doomed from the outset

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If only to save face, Lowe’s Companies chief executive officer Marvin Ellison had to come up with something good to say about the U.S. home improvement giant’s move to sell its Canadian retail operations last week for a fraction of what it had invested in them.

“The sale of our Canadian retail business is an important step toward simplifying the Lowe’s business model,” Mr. Ellison offered after North Carolina-based Lowe’s announced the division’s sale for US$400-million in cash and future “performance-based deferred consideration” to New York private equity firm Sycamore Partners.

That much is true. Lowe’s LOW-N 15-year-long Canadian odyssey has been marked by one complication after another, owing to the U.S. company’s limited understanding of the distinct Canadian (and especially Quebec) retail scene and unwillingness to adapt to it.

It is tempting to dismiss Lowe’s as a victim of the Target syndrome, as another example of a U.S. retailer failing to excite Canuck consumers. But Lowe’s entry into the Canadian market was not doomed from the start. It opened its first corporate-owned stores here in 2007 to rave reviews and, after its 2016 purchase of Rona Inc., it could count on a dealer network with deep roots and trusted brand loyalty in Quebec to take on rivals Home Depot and Home Hardware.

Throughout its 15 years in Canada, however, Lowe’s head office was constantly distracted by bigger problems the chain faced in the U.S. market, where it was dogged by activist shareholders and forced to fend up off unflattering comparisons with Home Depot. The Canadian division suffered from benign neglect. And Lowe’s U.S. senior management never seemed to care enough to change that.

“We gave Marvin Ellison an ‘F’ on this one,” says Michael McLarney, president of Hardlines Inc., which tracks the $58-billion Canadian home improvement sector. “Rather than explain [the Canadian division] to U.S. analysts on the next conference call, he’d rather just be done with it.”

Mr. Ellison took over as Lowe’s CEO in 2018 after U.S. hedge fund D.E. Shaw & Co. had led a shareholder revolt against his predecessor, Robert Niblock. The latter had been responsible not only for the politically unsavvy decision to launch a takeover offer for Rona during the 2012 Quebec election campaign, forcing Lowe’s to abandon the bid, but he presided over eventual purchase of Rona for $3.2-billion in 2016.

Mr. Ellison, a former Home Depot executive who had spent a few years running the troubled J.C. Penney department store chain, was not hired by Lowe’s board of directors with the Canadian unit in mind. And he felt no need to defend his predecessor’s decision to expand Lowe’s foreign footprint, especially after the company had also stumbled in Australian and Mexican markets under Mr. Niblock. Had it not been for the pandemic, Mr. Ellison might have sold the Canadian division earlier.

Instead, after closing dozens of stores here and taking a $US$958-million impairment charge on the Canadian division, Mr. Ellison replaced head of Lowe’s Canadian division, Quebec native Sylvain Prud’homme, with Tony Hurst, an American who had also worked at Home Depot and J.C. Penney.

By the time Mr. Hurst returned to the U.S. head office in early 2022, the Canadian division had already been officially on the selling block for months. And Caisse de dépôt et placement du Québec, which had cleared the way for Lowe’s acquisition of Rona by agreeing to tender its stake to the U.S. retailer in 2016, wanted back in. “We sent a letter [to Lowe’s] at the beginning of the process to signal our interest and the actions [the Caisse has] taken to create a buying consortium with other Québécois strategic firms and partners,” spokesperson Maxime Chagnon acknowledged in e-mailed statement. “Our door remains open.”

The Caisse may get another kick at the can. Sycamore is not expected to hold on to the Lowe’s Canada assets for very long. It will flip them, for a profit of course, as soon as it can.

Ironically, Sycamore was advised on the Lowe’s Canada purchase by RBC Capital Markets, which had worked for Lowe’s (along with CIBC World Markets) on the 2016 Rona deal. The amount Lowe’s paid for Rona in 2016 amounted to about 75 per cent more (in Canadian-dollar terms) than what it had offered in 2012.

Considering the sums Lowe’s invested in rolling out dozens of its own-banner big-box stores across Canada between 2007 and 2012, selling the entire Canadian division (including its significant deferred tax asset, based on cumulative operating losses) for US$400-million now is an admission of failure. The modest performance-based payments Lowe’s stands to pocket in the future will not change that.

Lowe’s may just have set a new standard for a U.S. retailer blowing it in Canada. But it did not have to end this way.