Lowe's Companies, Inc. Earnings: Can They Outgrow Home Depot's?

On Wednesday, Lowe's (LOW -0.14%) will release its quarterly report, and investors haven't quite known what to expect from the home-improvement retailer. Lowe's stock has been volatile lately as conflicting assessments of the housing market whipsaw investor sentiment about the company, and competition from rival Home Depot (HD -0.31%) as well as smaller niche players like Lumber Liquidators (LL) requires constant diligence from Lowe's in order to sustain its own growth prospects.

Lowe's has had a history of playing second fiddle to Home Depot, with Lowe's having suffered more during the housing meltdown and rebounded less quickly during the recovery. Lately, though, Lowe's has inspired value investors to take a closer look at the company, especially given expectations for faster growth than Home Depot in the near future and roughly similar growth prospects over the long run. Let's take an early look at what's been happening with Lowe's over the past quarter and what we're likely to see in its report.

Stats on Lowe's

Source: Yahoo! Finance.

Will Lowe's earnings give investors what they want?
In recent months, investors have cut their views on Lowe's earnings, reducing estimates for the April quarter and full fiscal year by $0.03 per share. The stock has fallen 3% since mid-February, with a much larger pullback from its best levels in early March.

Lowe's fourth-quarter report gave investors a mixed bag of results, as the numbers showed Lowe's didn't do as well as many had hoped but still put together solid performance in a challenging environment. Same-store sales rose 3.9%, and better margins showed how Lowe's has worked to try to improve efficiency and get more profit onto its bottom line. Moreover, with guidance for better than 21% growth in earnings per share on 5% higher revenue, Lowe's is setting the stage for better performance this year.

Yet Lowe's constantly has to deal with Home Depot, which has continued making improvements to try to better its competitive position. Home Depot has worked hard lately to improve its online experience, integrating e-commerce with its store locations to give customers the best access to all of its offerings. For now, a strong housing market has given both Home Depot and Lowe's plenty of opportunity for growth without tripping over each other, but if conditions deteriorate, Lowe's has to be ready to handle a more aggressive Home Depot and defend its hard-won recovery from further attack.

Source: Lowe's.

Smaller players also represent a threat to Lowe's. Lumber Liquidators has done a great job of focusing on the hardwood flooring specialty area, having seen comps soar 15.6% in its most recent quarter. With other small companies taking aim at other particularly profitable segments of the home improvement area, Lowe's could see more of its business shift toward lower-margin sales that could hurt growth in the long run.

More broadly, the question that Lowe's, Home Depot, Lumber Liquidators, and other companies face is whether the housing recovery will continue. Mixed data on the housing front have left investors uncertain about the industry's future prospects, as unexpected falling interest rates have actually supported affordability even as prices continue to climb. Yet much of the new building activity in the industry is happening with multifamily construction, and apartment dwellers aren't really the target audience for Lowe's.

In the Lowe's earnings report, watch to see how well the company does compared to Home Depot, which reports tomorrow. Staying ahead of the competition is an important goal for Lowe's, and if it can do so, its stock could rebound from its recent sluggishness.

Click here to add Lowe's to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.