Tooth and nails.

• Author: Mildenberg, David
• Position: Competition between Lowe's Companies Inc. and Home Depot Inc. - Includes related article on home center stores' price reductions - Industry Overview

North Carolina's dominant home-center retailer for decades, Lowe's tries to lose the slows before newcomer Home Depot gives it a shellacking.

Twenty-seven years ago, Lowe's opened a store in a former car dealership off U.S. 1 in Rockingham. A decade later, it moved to more spacious quarters, a 12,000-square-foot store at the bottom of a hill just north of downtown and adjacent to N.C. 220.

These days, however, shoppers aren't satisfied with home centers that offer only 14,000 different products. And downtown Rockingham long ago was bypassed as Richmond County's main marketplace by strip centers along N.C. 74, the busy highway from Charlotte to Wilmington.

So Lowe's Cos. Inc. closed that store in September and opened a 50,000-square-foot store by the highway in a shopping center anchored by Wal-Mart. The new store employs 92, 40 more than the old one, and offers 20,000 different items.

The move from small to big stores is happening across 20 states as the North Wilkesboro-based retailer undertakes its largest expansion ever. In August, Chairman Robert Strickland announced that this year Lowe's will build 30 stores, either 70,000 or 100,000 square feet, and relocate 30 smaller stores into larger structures. That compares with four new stores and 35 relocations in 1992.

Lowe's strategy -- investing heavily in towns like Rockingham (population 9,500) while trying to stave off fierce competition in cities like Charlotte from Atlanta-based Home Depot -- amounts to a big gamble, some observers say. But many agree that the company grew stodgy and bureaucratic in the '80s and left an opening for more aggressive and nimble rivals.

"To say they are going to open 60 stores next year is a major leap forward in terms of aggressiveness," says John Caulfield, executive editor of National Home Center News, a New York trade publication. "It tells me that management is at least awake."

But the perception of Lowe's sleepiness in recent years is deceptive.

Here's a company that grew from one hardware store in North Wilkesboro in 1946 into a 304-store chain with annual sales of $4 billion. Sales during the first nine months of the current fiscal year jumped 25%, while profits rose 46%. Its annual return has averaged 17%, including reinvested dividends, over the past 30 years. As people in Rowan County did with Food Lion, dozens in Wilkes County got rich buying a local company's stock in the early '60s and seeing it grow into a regional powerhouse.

Moreover, the company continues to grow without excessive borrowing. Long-term debt of $242 million is less than a third of stockholders' equity. Decades before worker empowerment became popular, Lowe's practiced it with an ESOP that owns nearly a quarter of the stock; employees with two years' service receive a bonus equal to 13% of their annual pay.

Remarkably, the company is controlled by the same people -- CEO Leonard Herring, Chairman Strickland and director Petro "Pete" Kulynch -- who've run it since Kennedy's presidency.

In short, Lowe's straightforward style has made it a giant of North Carolina business. Kulynch, a key executive from 1946 to 1983 and owner of $23 million of stock, sums up the company's ethos: "When you run a good, honest, dedicated business, you don't come up with a lot of surprises. You don't get caught up in any problems."

Unfortunately, all that's old hat to investors, who are prone to ask, "What have you done for me lately?" The unsettling news in North Wilkesboro these days is that Lowe's numbers pale compared with those of Atlanta-based Home Depot Inc., which has grown into a $5 billion retailer in only 14 years. Compared frequently to Wal-Mart because of its fanatic devotion to customer service and discount pricing, Home Depot can do no wrong. By February, Home Depot will have 214 stores. With investors valuing its shares at a stratospheric 60 times annual earnings, or $19 billion, each of those stores is judged to be worth $90 million.

In November, Lowe's stock was trading about 16 times earnings, or $1.5 billion, about $5 million for each store -- a disparity big enough to give the toughest CEO an inferiority complex. Though several analysts rate Lowe's stock as undervalued, no one is hyping Lowe's with the gusto reserved for Home Depot. Typical was the comment last spring by Atlanta analyst Dan Wewer Jr., of Robinson-Humphrey Co.: "While we plead guilty to redundancy, we cannot find any other way to say that if we could own just one retail stock for the next three years that our choice would be Home Depot."

Now Home Depot has invaded Lowe's...