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Home Depot Bleeds Orange

Like its archrival in blue, orange-tinted home improvement giant Home Depot (NYSE: HD  ) continues to sputter through a challenging housing market. The problem is, Home Depot's woes appear to be more daunting than those faced by Lowe's (NYSE: LOW  ) .

With same-store sales dropping 6.5% in the first quarter, the few new stores Home Depot is opening these days didn't generate enough sales to offset the decline at existing locations, and total sales fell 3.4%. Reported earnings of $0.21 included $0.20 in charges, primarily related to the closing of 15 underperforming stores. Even backing out the restructuring charge, the bottom line fell 14.6% from the $0.48 reported last year, which excluded results from the Home Depot Supply segment, which has since been sold.

In case you can't tell by all the one-time charges, after years of underinvestment in its core business, Home Depot is still working to get back on track. Management is diligently working to reinvest in its customer service as a multiyear project and recently reeled back its expansion plans, canceling projects that weren't expected to meet target returns.

Speaking of expansion, there wasn't much this time around. Total square footage grew just 3.9% for the quarter, and gross margins inched up just 14 basis points. As with many retailers these days, commodity-based inflation is making purchases more expensive, and falling top-line trends coupled with rising expenses don't make for favorable bottom-line trends. This was seen in Home Depot's double-digit increase in operating expenses -- 16.4%, leading to a drop of 495 basis points in the operating margin.

I'm more than willing to wait out the challenging macroeconomic environment, because I see Home Depot and Lowe's as the undisputed leaders in the do-it-yourself industry. And status as a big-box retailer has its advantages, as Wal-Mart (NYSE: WMT  ) , Costco (Nasdaq: COST  ) , and Best Buy (NYSE: BBY  ) can attest. However, the key disadvantage I see for Home Depot is that domestic store expansion has mostly run its course. In contrast, Lowe's plans to open about 120 stores this year, leaving some level of sales growth until comps improve at existing stores. Both should recover when industry conditions improve, but I agree with fellow Fool Rich Smith that Lowe's continues to look like the safer bet right now.    

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Related Tickers

10/24/2016 4:00 PM
HD $127.78 Up +1.18 +0.93%
Home Depot CAPS Rating: ****
BBY $39.46 Down +0.00 +0.00%
Best Buy CAPS Rating: *
COST $152.12 Up +3.15 +2.11%
Costco Wholesale CAPS Rating: ****
LOW $70.98 Up +0.33 +0.47%
Lowe's CAPS Rating: ****
WMT $69.19 Up +0.85 +1.24%
Wal-Mart Stores CAPS Rating: ***