Best Home Improvement Stock: Lowe's vs. Home Depot

Which home improvement retailer is a better choice: Lowe's or Home Depot?

May 22, 2014 at 10:20AM

HD Chart

HD data by YCharts.

Coke vs. Pepsi, Yankees vs. Red Sox, or Justin Bieber vs. good taste -- rivalries and competition are an essential part of business and life. Now that both Lowe's (NYSE:LOW) and Home Depot (NYSE:HD) have reported earnings for the last quarter, let's take a look at these two major home-improvement retailers, and try to find out which one is the better choice for your portfolio.

Home Depot
Home Depot reported a sales increase of 2.9% during the quarter ended on May 4, with total revenues reaching $19.7 billion in the period. Total comparable-store sales increased 2.6% during the quarter, while comparable-store sales in the U.S. performed better, with an increase of 3.3% versus the same quarter in the prior year.

Like many other retailers, Home Depot said that the unusually cold weather had a negative impact on sales during the quarter, and management is expecting a considerable acceleration in growth during the coming months. It's always hard to tell if external factors such as the weather are a real headwind or a simple excuse for poor performance; however, climate conditions seem to have been a real issue for Home Depot during the last quarter when judging by monthly sales figures.

Comparable-store sales in the U.S. grew 2.8% in February, 4.6% in March, and 2.8% in April. Adjusting for the different timing of Easter in 2014 versus 2013, same-store sales in the U.S. would have been 2% higher in April, so performance has been definitively improving with friendlier weather.

Management is doing a solid job on the profitability front: Gross margin improved by 10 basis points to 35% of revenues, while operating margin expanded 70 basis points to 11.6% of sales. Home Depot has an active share-buyback program, and the company reduced its share count by 6.9% versus the same quarter in the previous year. Adjusted earnings per share came in at $0.96, a 15.7% increase versus $0.83 per share in the same quarter during 2013.

Management reaffirmed its outlook for a 4.8% increase in sales during the current fiscal year on the back of a forecast jump of 4.6% in comparable-store sales. Earnings per share are expected to increase by 17.6%, to $4.42; this includes a gain of $0.04 per share related to the sale of Home Depot's holdings in HD Supply.

Lowe's
Lowe's reported $13.4 billion in sales during the quarter ended on May 2, a 2.4% increase versus the same period in the prior year, while comparable-store sales increased by 0.9% during the quarter. Both on a total sales and comparable-store sales basis, Lowe's is underperforming Home Depot.

Like Home Depot, Lowe's was hurt by challenging weather during the last quarter, and management is also optimistic regarding the prospects for an acceleration in growth during the rest of the year: "Performance has improved in May, which, together with our strengthening execution, gives us the confidence to reaffirm our sales and operating profit outlook for the year."

The company is also generating solid profitability in spite of the harsh environment affecting sales during the quarter: Gross profit margin came in at 35.5%, a 70-basis-point increase versus the same quarter in the prior year, while operating margin increased to 8% of revenues versus 7.5% in the year-ago period. Lowe's reduced its share count by 6.7% during the quarter.

Net income increased 15.6%, to $624 million, and adjusted earnings per share excluding extraordinary items came in at $0.58, an 18.3% increase versus $0.49 per share in the same quarter last year.

Lowe's reaffirmed guidance for a sales increase of 5% during fiscal 2014, and the company expects comparable-store sales to grow by 4% during the year. Diluted earnings per share are forecast to be $2.63, marginally better than the $2.62 per share forecast on average by Wall Street analysts.

Foolish takeaway
Both Home Depot and Lowe's were transitorily affected by the unusually cold winter during the last quarter, but the two companies are expecting accelerating growth during the rest of the year. Still, Home Depot did considerably better than Lowe's in terms of sales, especially when it comes to comparable-store sales during the quarter. This may be because Home Depot has a stronger relationship with contractors, which provides stability through challenging times.

Hd Vs Lowes

Data source: SEC filings.

Sales performance is a crucial factor to consider when making investment decisions in such a competitive industry as retail, in which gaining market share versus the competition can make a lot of difference in financial performance over time. It looks like Home Depot is built on firmer ground than Lowe's.

You can make a lot of money by investing to profit in the war for your living room
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple.

Andres Cardenal has no position in any stocks mentioned. The Motley Fool recommends Home Depot. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers