Dive Brief:

• Activist investor D.E. Shaw & Co. has acquired an activist position in home improvement retailer Lowe's, Bloomberg reports, citing unnamed sources. D.E. Shaw didn’t immediately return Retail Dive’s request for more details and a Lowe's spokesperson said in an email that, "a s a matter of company policy, we do not comment on market rumors or speculation."

• For several months there has been "more than a usual amount of activism chatter" surrounding Lowe’s, according to a note from Gordon Haskett analyst Don Bilson emailed to Retail Dive.

• D.E. Shaw, which was not included in Gordon Haskett’s earlier speculation about which activist investors might make such a play, is focused on the home improvement retailer’s performance in light of its peers, particularly surging Home Depot, although a merger with any rival isn’t on its list of preferred change, according to Bloomberg’s report.

Dive Insight:

Activist investors tend to pounce on companies they see as undervalued and typically push for a change in strategy, expense management or makeup of a company’s executive suite or board (or some combination) to unlock value. Gordon Haskett’s Bilson noted on Friday that director nominations at Lowe’s are due in less than three weeks, "which means we're getting late in the shot clock for any activist to make a big splash at this $80 billion home improvement specialist."

"[W]e thought the North Carolina-based [Lowe’s] might get targeted right around the time Q3 13-Fs were due, as anyone who had built a position ahead of September 30 would presumably have had to disclose that position in mid-November," he said. "To our disappointment, November 14 passed without incident and [Lowe’s] has since moved from $80 to $95."

D.E. Shaw, or "anyone looking to push an activism campaign" at Lowe’s, "would certainly frame it as an opportunity to close a margin gap with [Home Depot] and tap into a reserve of earnings power," according to Bilson. "The question is: Will someone show up ahead of the nomination deadline to pull the trigger?"

Someone has, but it’s not clear exactly what D.E. Shaw will be asking for. Lowe’s in November reported a 6.5% third quarter sales rise to $16.77 billion from $15.7 billion in the year-ago quarter, beating the Zacks consensus estimate of $16.57 billion. Gross margin increased 5.7% year-over-year to $5.71 billion and 34.07% of sales, compared to $5.41 billion and 34.35% of sales a year ago, and same-store sales in the quarter rose 5.7%, driven by a 4.8% increase in average ticket and transaction growth, and U.S. same-store sales rose 5.1%. Hurricane-related sales in the quarter were some $200 million, though that didn't measurably add to earnings. 

More importantly to D.E. Shaw, perhaps, is that while Home Depot and Lowe’s are both benefiting from healthy home sales, Home Depot is the one running away with the bulk of the spoils. The rivals have both not only benefited from the strong housing market but also, more recently, devastating hurricanes that drove unexpected home repair sales. The two will likely always share the advantages of such external forces, but it may be time for Lowe's to think about how it can differentiate from its bigger rival, suggested GlobalData Retail Managing Director Neil Saunders.

"As much as there is room for two home improvement giants in the market, Lowe's playing second fiddle to Home Depot is a longstanding issue," he said in an email to Retail Dive. "Lowe's needs to work harder to build its brand presence and recall, something that recent advertising and marketing have begun to address. The next step should be to think about the areas where Lowe's can differentiate from Home Depot and win market share."

Interior decor is a Lowe's strong suit and a possible foil against its competitor, and Saunders suggested Lowe's should build that up more. But Home Depot recently positioned itself to steal that advantage, too, with its pre-Christmas acquisition of The Company Store, which "provides product development and sourcing capabilities to help us expand our online décor business into broader categories across the entire home," Home Depot CEO Craig Menear said in December.