Lowe's (LOW 0.21%) chief executive just announced plans to retire and make room for fresh leadership at the nation's second-biggest home improvement retailer. CEO Robert Niblock guided the company through the housing market collapse and the subsequent rebound that powered annual sales to over $68 billion in 2017 from $48 billion 10 years earlier.
Yet throughout that recovery Lowe's has trailed market leader Home Depot (HD +0.33%) in many critical operating metrics. It has also been unusually conservative when it comes to its capital return plans.
With those stumbles in mind, let's look at a few changes that shareholders are hoping might be coming to the retailer now that the leadership is in transition.
Image source: Getty Images.
Steadier market share
The home improvement market has been on a tear lately. Since bottoming out near $400 billion in 2010, in fact, annual spending in the industry recently passed $767 billion.
Annual home improvement spending in billions. Data source: Federal Reserve Economic Data.
Yet Home Depot has captured far more than its fair share of those increases. Its comparable-store sales shot up by 6.9% in 2017 to mark an acceleration over the prior year's 5.6% boost. Lowe's, meanwhile, grew comps by just 4.2% in 2016, and sales gains ticked down to a 4% rate in the year that just closed.
At each step along the way, Home Depot has kept its customer-traffic numbers improving at a solid clip whereas Lowe's has struggled. In the most recent quarter, for example, traffic dipped by almost 1% while Home Depot's jumped 2% higher. This stubborn market-share slide will likely be the incoming CEO's main priority to tackle, especially after Lowe's recent traffic-boosting initiatives didn't deliver results.
Improving profit margin
The operating gap between the two retailers is even more dramatic when it comes to profit margins. Home Depot last year passed its long-term target of 14.5% operating margin a full year ahead of schedule, as profitability more than doubled since the housing crash. But Lowe's comparable figure hasn't broken back into the double digits and remains significantly below the all-time high, set when the market peaked in 2007.
LOW Operating Margin (TTM) data by YCharts.
Lowe's executives recently announced plans to get profits back on track through initiatives aimed at improving the in-store shopping experience. They also want to bring in more exclusive product partnerships like the one Lowe's just announced with paint giant Sherwin Williams. Those moves should give the new CEO some positive early momentum, but the executive's tenure is likely to be judged in part by Lowe's ability to close this profit gap over time.
Stronger capital returns
Looking at just their capital return programs, an investor might conclude that Home Depot and Lowe's operate in different industries. The market leader sends 55% of its annual earnings haul back to shareholders in dividends, while Lowe's promises investors just a 35% payout ratio.
And Home Depot spent $8 billion on stock buybacks last year, which marked a boost over the prior year's aggressive $7 billion outlay. Lowe's stock spending, on the other hand, has held steady over the last three years even though operating cash flow is trending higher.
The retailer should have ample funds available to boost these cash returns given that Lowe's plans to open just 10 new stores in 2018 even as it benefits from a plunging effective tax rate. But the new CEO would still have to show improving operating trends to confirm early optimism that Lowe's can finally start closing the sales and profit gap with Home Depot.
