Home Depot
Home Depot's third-quarter earnings report showed a 21% jump in profits over the same period last year, but investors drove the stock down 13% nonetheless. Why? Because the increase was due largely to cost-cutting measures and had little to do with demand.
In fact, business at stores open at least a year, called same-store sales, dropped 2% for the quarter. That's especially disappointing considering the company was expecting a 2% to 4% increase. Another key measure, average weekly sales per store, fell 6%. To top off the bad news, management said fourth-quarter and full-year earnings would likely come in a penny a share lower than expected.
Lowe's, meanwhile, delivered an upbeat third-quarter report yesterday, with profit increasing 35% and same-store sales leaping 4%. Why is this company doing so well compared to Home Depot?
There are worries the latter has reached a sort of saturation point, where new store openings cannibalize sales of existing locations. Management denies this and plans to open 58 more locations before the end of December, bringing the year's total to 200.
Home Depot's plans, and its performance, have disillusioned investors for years. Lowe's has easily outperformed it over the past one-, three-, five-, and 10-year periods. As an example of how bad it's been, consider that $10,000 invested in Lowe's three years ago would be worth $15,000 today, while the same amount in Home Depot stock would be worth barely over $5,000.
Of course, the only thing that counts now is the future. But considering Lowe's is performing much better than its rival -- while only slightly more expensive using traditional valuation measures -- it's hard to make a case for Home Depot.
