Lowe's is Closing Stores -- Can it Keep Up With Home Depot?

Lowe's (LOW -0.21%) is in the midst of shrinking its store footprint, which isn't the best news for investors, but at least it signals that the retailer is doing what it can to get its cost structure in order. And it needs to, because as reflected in its recently released third-quarter report, it's not growing at the rate of Home Depot (HD -0.67%), and same-store sales came in below estimates.

In this segment from MarketFoolery, host Chris Hill and Motley Fool Asset Management's Bill Barker weigh in on the deeper questions around the company, including this one: Once Lowe's transformation is further along, will the macro trends support its rebound?

A full transcript follows the video.

This video was recorded on Nov. 20, 2018.

Hill: Let's move on to Lowe's. Lowe's third quarter not nearly as good as Home Depot's last week. Expectedly, shares of Lowe's falling today. Part of the confidence that I think investors might want to have in Target is the fact that despite the higher costs in the third quarter, Target didn't change their guidance for the full fiscal year. That is not the case with Lowe's. In addition to their third quarter numbers, they also cut their forecast.

Barker: As we just went over, part of the equation here traditionally would be that you have good comp numbers, which allows you to open more stores. Well, Lowe's is now in the process of closing stores. They're saying 31 stores in Canada, 20 in the U.S. They're contracting, in terms of their store count. Where is the growth going to come from there? I'm not saying that's the wrong business decision. If you have over-supplied in terms of stores, you've got too many too close together -- I think most of the stores that they've announced that are going to be eliminated are within ten miles of another store. They're going to be more efficient. That'll help the comp numbers in the remaining stores once it's completed. But you've got to take a big charge to earnings to close those stores. That's what's befalling Lowe's stock today.

Hill: And, throw in the fact that previously, Lowe's had announced that it was closing all of its Orchard Supply Hardware stores, which was a smaller brand in the Lowe's portfolio. This can all make a lot of sense, and these can all be the right decisions, but if you're looking at Lowe's in 2019, 2019 is shaping up as a year for Marvin Ellison and his team at Lowe's where they really need to deliver. If this year has been, "We need to take a hard look at how we manage our inventory. We need to take a hard look at our locations. Yes, we're going to close Orchard Supply. Yes, we're going to methodically close certain locations in North America," that's fine. But they really need to deliver next year.

Barker: Yeah. You can be more confident in that delivery occurring if the housing market is really healthy. And the housing market is beginning to show signs, in the wake of interest rates moving up and mortgage rates also moving up, of a softening in the housing market. All these markets are really local, and some are doing better than others. But nationally, there's been slowdown. The numbers out yesterday showed that homebuilder confidence was at a two-year low. That's an issue.

Margins are also an issue. The cost of lumber has been going up, in large part due to some of the tariffs, and the lumber coming in from Canada. There are a lot of different moving pieces, all of which are moving in the wrong direction for Lowe's, other than the economy in general, which is still quite healthy. That's more use than maybe just about anything, but the housing economy specifically is a problem.

Hill: If housing is really that bad --

Barker: I don't want to say housing is bad. It's softening. It's different. I don't want to oversell the problems in the housing market.

Hill: I appreciate that. But we've talked for years about how, for people who have not invested in housing, one of the easiest entry points for an investor looking at individual stocks is Home Depot and Lowe's. Over time, they've been steady businesses. At various points, one has done better than the other. But generally, they have been seen as safer investments than a straight-up homebuilder or that sort of thing. Sorry to keep going back to last week, but if Home Depot is going to put up a third quarter like they just did, and the stock is going to drop because there are all of these concerns about the housing industry, that makes me wonder if there's anything related to the housing market, in terms of stocks, that's worth buying right now.

Barker: I think Home Depot is still -- disclosure, I own some shares of Home Depot -- probably the place I would be most confident in a sustainable floor, that is housing builders, homebuilders. Boy, you get some wild, wild swings there. When times are good, they skyrocket. When times are bad, they look like they're going bankrupt. Home Depot is a far lower ceiling, higher floor on that, and it's been doing a better job than Lowe's for quite some time. Although there was, as you say, weakness post-earnings-report, I'd rather have a good earnings report and stock weakness than vice versa.