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First Order of Business for Lowe's New CEO: Clean House

Just days after stepping into his new role as CEO of Lowe's (NYSE: LOW), Marvin Ellison is taking a sledgehammer to the home-improvement center.

He joined the retailer on July 2. A week after hanging his nameplate on his door, Ellison announced he was reorganizing the company's C-suite structure by eliminating the positions of chief operating officer, chief customer officer, corporate administration executive, and chief development officer.

The responsibilities of these jobs will be assumed by other executives -- including some newly-created EVP-level roles -- who will report directly to Ellison. Lowe's CFO is also retiring in October.

Fashion fixtures have always been a key differentiator between Lowe's and Home Depot. Image source: Lowe's.

No time to waste

To keep Lowe's from slipping further behind Home Depot (NYSE: HD), Ellison said a shake-up was necessary. "We have taken a fresh look at our organizational structure and are realigning our leadership team to improve our focus, better leverage Lowe's omni-channel capabilities and deliver increased value for our customers, associates and shareholders."

It's clear that Ellison is hitting the ground running. While he made major moves at J.C. Penney (NYSE: JCP) when he took over the top spot there, he didn't take action nearly as fast as he's doing at Lowe's.

Considering that J.C. Penney was in much more dire financial straits than Lowe's is today, it may seem odd that Ellison is moving with such alacrity now. However, the new CEO may not have much time.

According to Forbes, activist investor Bill Ackman of Pershing Square Management is keeping close tabs on Ellison. who may feel pressured to quickly accelerate Lowe's growth. Ackman lost a half-billion dollars betting on J.C. Penney's turnaround, after the strategy of the CEO he brought on, Ron Johnson, nearly drove the retailer to financial ruin. Now the hedge-fund operator has a billion-dollar bet riding on Lowe's, and he does not want a repeat performance.

Or as Forbes put it, "... [T]he Lowe's clock is ticking. And with Ackman as the timekeeper, Marvin Ellison is a man in a hurry."

Using the tools at hand

Ellison at least has more to work with at Lowe's than he did at J.C. Penney. With the department store chain perilously close to financial ruin, he could not easily make major changes there.

There is more flexibility with Lowe's. Furthermore, because Ellison has relevant experience in the industry, having spent well over a decade at Home Depot, he has been able to take decisive -- and dramatic -- action as his first order of business, even though Lowe's doesn't necessarily need a wholesale makeover.

Lowe's sales growth has lagged behind its rival's for several years. Although Lowe's reported comparable sales growth in the first quarter, its 0.5% gain was anemic compared to the 3.9% increase Home Depot reported. Traffic was up, but Lowe's operating margin suffered due to double-digit comp sales growth in appliances -- a lower-margin category where Lowe's is the national leader.

Still, this performance suggests only tweaks to operations are necessary, rather than tearing down the house and rebuilding it again. Lowe's needs to better demonstrate and communicate with customers how it is different from Home Depot. With a new leader at the helm who has a deep understanding of its rival, Lowe's has a much better chance of doing so.

Key investment takeaway

After having made the significant change of realigning his C-suite, Ellison can now settle down to the task at hand of lighting a fire under his staff -- just as Ackman may be igniting one under his own feet. But turnarounds don't happen quickly. Lowe's stock doesn't offer much of a discount to Home Depot, so meaningful share price appreciation may not happen anytime soon.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool is 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.

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