Home Depot Innovates to Stay Ahead of Lowe’s

Home Depot and Lowe’s are similar in many ways yet different in others. Home Depot has recently announced several initiatives, one of which could give it a lead in targeting today’s demanding consumer.

Apr 1, 2014 at 4:00PM
Home Depot

homedepot.com

Home Depot (NYSE:HD) and Lowe's (NYSE:LOW) are constantly competing for customers. One on hand, it's a negative for both companies that the other one exists. If all current Lowe's customers shopped at Home Depot, it would be one of the greatest growth stories on the planet -- still.

On the other hand, it's good for these companies that the other exists. Competition breeds success, and this is no exception. For instance, Home Depot knows that it must continue to innovate in order to stay ahead of its arch-rival. When companies constantly innovate, business usually improves. 

Omnichannel integration
One of Home Depot's latest initiatives is to improve its omnichannel integration. In other words, Home Depot wants to improve the customer experience by making it easier for people to shop when, where, and how they want -- whether it be in-store, online, or on a mobile device. In order for a retailer to survive, let alone thrive, in today's consumer environment, it must offer a seamless omnichannel experience. In fact, a lot of Home Depot's IT spend goes to omnichannel

For an example as to why this is so important, consider the following facts. Approximately 10% of online orders are actually generated in the store -- when a customer is talking to an employee. Approximately 30% of online orders are picked up in-store. This, in turn, increases the odds of a customer picking up an extra item while in the store. In fact, approximately 20% of customers opting for in-store pick-up buy an additional item while at the store.

Home Depot currently has several key initiatives, which include the improvement of the customer experience, the development of a new supply chain, and increased traffic (in-store and online). In regards to the online business, Home Depot now has rapid deployment centers, which have improved in-stock rates, churns, and customer service. Another long-term goal is to improve customer delivery times. And then there's the HD Pro Xtra loyalty program. 

Demand for free is always high
Home Depot is constantly looking for ways to drive more traffic to its stores. What makes HD Pro Xtra unique is that it's exclusively offered to professionals, primarily contractors. 

The best part for contractors is that this loyalty program is free. This could lead to sustainable demand, which would then lead to increased sales for Home Depot -- contingent upon the housing market remaining strong. 

HD Pro Xtra loyalty program benefits include assortment planning tools (helping improve inventory), reloadable cards that can be shared throughout a business (no phone approvals -- saves time and money), real-time pricing and images for sales proposals, free estimator tools, purchase tracking tools (easier bookkeeping), special offers, business tools, and email offers/receipts.

Despite all the aforementioned initiatives, its still difficult for Home Depot to establish and maintain a strong lead over Lowe's. 

Same breed
Home Depot and Lowe's are trading at 22 and 23 times  earnings, respectively. Also consider top-line performances over the past five years. Over this period, Home Depot has growing its top line 13.3% while Lowe's has grown its top line by 11.2%. Over the past year, Lowe's has grown its top line 5.9% while Home Depot has grown its top line 3.6%. Even debt-to-equity ratios are similar. Home Depot sports a debt-to-equity ratio of 1.2, whereas Lowe's is slightly more impressive in this category with a debt-to-equity ratio of about 0.9. 

One big difference between these two companies is the all-important cash flow. Over the past year, Home Depot has generated $7.6 billion in operational cash flow, whereas Lowe's has generated $4.1 billion in operational cash flow. And then there's dividend yield. Home Depot currently yields 2.4%, whereas Lowe's yields 1.4%.

If you're looking for a company that's growing faster than both Home Depot and Lowe's, then you might want to consider Sherwin-Williams (NYSE:SHW). It has grown its top line by 36.4% over the past five years, and it's currently trading at a respectable 28 times earnings. It has generated positive operational cash flow of approximately $1.1 billion over the past year, sports a decent debt-to-equity ratio of slightly less than 1, and currently offers a dividend yield of 1.1%.

Sherwin-Williams has also outperformed Home Depot and Lowe's over the past three years concerning stock appreciation. Over this time frame, Sherwin-Williams has seen its stock appreciate 153.8%, while Home Depot and Lowe's have experienced stock price appreciation 136.9% and 98.28%, respectively.

The Foolish takeaway
Sherwin-Williams is a company that you might want to dig deeper on. Regarding Home Depot vs. Lowe's, it's a constant innovation battle. Home Depot's focus on omnnichannel integration should eventually see traction. Home Depot also generates more cash flow, which should lead to more innovative opportunities, the potential for increased capital to shareholders, and the option of paying off debt.

While both Home Depot and Lowe's are quality companies, keep a close eye on mortgage rates. They won't stay low forever. If the 30-year fixed mortgage rate goes significantly higher, then the housing market could stumble, which would impact home-improvement stores. Please do your own research prior to making any investment decisions.

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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Home Depot and Sherwin-Williams. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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