Lowe's reported earnings this morning. Though Home Depot is still clearly the more efficient and dominant force in the industry, Lowe's is growing rapidly while making inroads. It's probably a good idea to be cautious with both companies' stocks, since the ongoing battle could easily bloody each.
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Just about every article I write generates a handful of reader emails, but I wasn't prepared for the flood of messages I received after writing "Is Home Depot a Short?" early last week. Many were from the Home Depot (NYSE: HD) faithful telling me I was a fool -- small "f" -- others were from investors thanking me for the insights, and still others came from those who thought Home Depot's problems were due solely to Lowe's (NYSE: LOW). Of the last group of emails, many seemed to say that while they liked Home Depot's prices, Lowe's stores had similar prices, higher-quality merchandise, and a better-maintained selling floor. Basically, it looks like Lowe's marketing message of having cleaner, brighter stores is getting real traction with the public. The emails also seemed to say while Home Depot could easily roll over the local mom and pop hardware stores, the stores are having a much more difficult time keeping business once a Lowe's opens down the street. (For more on the retail business, visit our InDepth: Retail page.) I've never stepped inside a Lowe's store, so I cannot personally attest to these qualitative measures. But I can certainly crunch numbers and see which company is the stronger, financially, of the two. That comparison got much easier this morning after Lowe's reported fiscal first-quarter earnings. The company reported earnings of $0.58 per share, four pennies better than the mean estimate. This was up from last year's $0.47 and compared quite favorably to Home Depot's roughly flat EPS. Using this most-recent data, let's see how the two companies now stack up: When I look at these figures, two things stick out. First, Home Depot is still without a question the dominant player in the industry and is generally more efficient. The other thing that sticks out is the fact that even in this economic climate, Lowe's managed to slightly expand its net profit margin while Home Depot's net margins saw considerable pressure. This second fact lends credibility to my hypothesis that Home Depot's store-level financial deterioration is not due to the economy alone. Rather, Home Depot appears to have more insidious problems related to increased competition from Lowe's as well as new Home Depot stores cannibalizing sales of existing stores. Home Depot's return on invested capital (ROIC) is still far better than Lowe's. But Home Depot's ROIC is falling, and the disparity is shrinking quickly. So which company is winning the home improvement warehouse battle? Right now, it appears that Home Depot remains solidly in the lead. But the company better watch its back, because Lowe's is coming up fast. It's probably a good idea to be cautious with each company's stock, since the ongoing battle will likely bloody both. Paul Larson will be hitting his local True Value in order to fix a leaky outdoor spigot this weekend. You can see Paul's complete stock holdings online. The Motley Fool is investors writing for investors.(As of the end of each company's fiscal Q1)
Home Depot Lowe's
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Sales $12.2B $5.3B
Sales Growth 9.8% 18.1%
Same-Store Sales (3%) (3%)
Gross Profits $3.7B $1.5B
Gross Profit Margin 30.0% 28.3%
Last Year's Gross Margin 29.5% 27.9%
Net Income $632M $225M
Net Profit Margin 5.2% 4.3%
Last Year's Net Margin 5.7% 4.2%
Asset Turnover - Q1 0.5x 0.4x
LT Debt to Equity 8.1% 57.3%
Sales per Sq. Ft. $95.31 $73.38
New Stores Opening in 2001 200 115
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