Lowe’s announced that it has sold its Canadian business to private equity firm Sycamore Partners for $400 million in cash. Lowe’s Canadian business, based in Boucherville, Quebec, operates 450 corporate and independent affiliate dealer stores under various banners including Rona (which Lowe’s acquired in 2016), Lowe’s Canada, Reno-Depot and Dick’s Lumber, according to a company press release. The deal, set to close in early 2023, is expected to have a pre-tax non-cash impairment charge of about $2 billion on Lowe’s third quarter earnings results.

According to CEO, Marvin Ellison, the move to sell off its Canadian retail business is to help Lowe’s simplify its business model. “While this business represents approximately 7% of our full year 2022 sales outlook, it also represents approximately 60 basis points of dilution on our full year 2022 operating margin outlook,” Ellison said in a statement, adding that, “By executing this transaction, we will intensify our focus on enhancing our operating margin and [return on invested capital], taking market share in the U.S. and creating greater shareholder value.”

Lowe’s began a strategic review of its Canadian operations in the third quarter of fiscal 2019 and later that year announced actions to improve the performance and profitability of that business segment. In fiscal 2020, the company had pre-tax operating costs of $45 million related to inventory write-downs and other closing costs.

The home improvement retailer on November 3 reaffirmed its fiscal 2022 outlook, projecting total sales to be between $97 billion and $99 billion, and comparable sales to be down 1% on the low end or up 1% on the higher end. Operating margin is expected to be between 12.8% and 13%.

“We remain confident in our short and long-term outlook for the U.S. business, underscored by improved sales trends and strong profit flow-through in the third quarter, as well as our expectations for solid business performance for the remainder of 2022,” Ellison said.

Lowe’s Canadian business joins several other retailers within Sycamore’s portfolio, including Ann Taylor, Loft, Lane Bryant, Belk and Talbots.

What does this mean for the Canadian hardware sector?

Sycamore will take over about 450 stores, including 70 Lowe’s big-box stores and some 150 corporate-owned Rona stores as well as the wholesale business supplying 210 independent Rona dealers. Many of those independent dealers are expected to end their contracts with Lowe’s Canada and look for new hardware and building-materials buying groups to ally themselves with, such as Castle Building Centres Group Ltd., Groupe BMR Inc., or Home Hardware Stores Ltd.

“It’s going to be shark week,” said Michael McLarney, a hardware industry specialist who runs trade publication Hardlines. “The other groups are going to be circling trying to get these Rona dealers to convert.”

Behind the scenes, the jostling has already started. And it reflects the view by many hardware business owners that a private investment firm is not necessarily the best partner during a time of economic upheaval, as they tend not to be long-term owners. After a two-year period during which the industry in Canada benefited from a surge in home renovations during the COVID-19 pandemic, hardware retailers are now resetting sales forecasts and bracing for a recession.

Source: The Globe and Mail
Source: The Globe and Mail
Source: Retail Dive