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3 Ways Home Depot Widened Its Lead Against Lowe's in 2018

By Demitri Kalogeropoulos – Updated Apr 22, 2019 at 11:31PM

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The retailer demonstrated yet again last year why it is the industry's top dog.

Investor concerns about a slowdown in the housing industry kept a lid on both leading home improvement retailers in 2018. But while Home Depot (HD 0.28%) stock trailed the market and fell a bit more than Lowe's (LOW -0.30%), the company's business results gave shareholders no reason to complain.

To the contrary, in fact: Home Depot extended its lead across core growth and profitability metrics, leaving it in a good position to thrive through whatever the next business cycle might bring.

Man with shopping cart examines a piece of lumber

Image source: Getty Images.

Stealing market share

As the market share leader, Home Depot always has the most to lose from peers seeking to chip away at its dominant industry position. Lowe's made a point of attacking its rival's momentum, especially in the professional contractor niche, with management saying early in the year that they were moving with "urgency" to speed sales growth back up in 2018.

The rebound initiatives included price cuts and longer store hours, but they didn't have the desired effect. Instead, Lowe's comparable-store sales gap with Home Depot was nearly 4 full percentage points in the first quarter, and about the same in the second and the third. Home Depot did a better job anticipating customer needs and stocking those products at the right levels. Lowe's, on the other hand, struggled at times to satisfy that basic retailing competency.

Profitability and cash returns

The rivals started the year with vastly different earnings profiles and that gap just grew wider as 2018 progressed. Through the year's first nine months, Home Depot generated $12.1 billion of operating profit equating to 14.8% of sales compared to $11.5 billion, or 14.9% of sales a year earlier.

Lowe's comparable figure worsened to 8.2% of sales from 10%. Sure, part of that decline had to do with one-time charges the company took in its restructuring moves. However, Home Depot has been expanding its earnings lead over Lowe's for most of the last decade with successful moves like its push deeper into the pro contracting and the maintenance, repair, and operations niches. That trend held up in 2018.

Home Depot shareholders received surging cash returns as a direct result of all this outperformance. The company doubled its stock buyback spending pace to $8 billion from $4 billion at the start of the year. Home Depot also sends 55% of earnings to investors through its dividend compared to Lowe's less-generous 35% payout target.

Looking ahead to 2019

Both companies will report their fiscal fourth-quarter results in late February in a pair of announcements that aren't likely to dramatically change the market share or profitability narratives. Home Depot is looking to achieve full-year growth of 5.3%, compared to around 2% for Lowe's.

The key question going forward is whether Lowe's new CEO and aggressive strategic moves including store closures will finally put it in a position to match its peer's long streak of operating wins. Nothing in the last few earnings reports supports that reading, though, and the chain's rebound would only get harder to manage if the industry does hit a cyclical downturn (as investors fear it might in 2019). Thus, whether or not you believe a slowdown is coming, it still makes sense to favor a position in Home Depot over its cheaper -- but less successful -- rival today.

Check out the latest Home Depot earnings call transcript.

Demitrios Kalogeropoulos owns shares of Home Depot. The Motley Fool has the following options: short February 2019 $185 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Home Depot and Lowe's. The Motley Fool has a disclosure policy.

Stocks Mentioned

Home Depot Stock Quote
Home Depot
$327.99 (0.28%) $0.92
Lowe's Companies Stock Quote
Lowe's Companies
$214.84 (-0.30%) $0.64

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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