Lowe's (NYSE:LOW) investors haven't had many occasions lately to celebrate comparisons with the chain's rival, Home Depot (NYSE:HD). The market leader has consistently widened the performance gap between the two retailers recently, including in key metrics like sales growth, profitability, and cash returns to shareholders in 2018.

These comparisons will take center stage when Lowe's announces its fourth-quarter earnings results on Wednesday, Feb. 27, just a day after Home Depot reveals its quarterly numbers. The report will also mark an important opportunity for investors to hear some concrete predictions from CEO Marvin Ellison as he looks out to his first full year as the leader of a business that's struggling to match up against his former employer.

A customer selects a piece of lumber.

Image source: Getty Images.

A quarter of contrasts

Warning signs in the cyclical home-building industry have had investors feeling nervous about home-improvement stocks lately. But it wasn't the economy that held Lowe's back in the most recent quarter. In fact, Ellison said healthy economic trends ensured that plenty of customers streamed into its aisles and visited its e-commerce sales channel in the third quarter.

Lowe's just couldn't satisfy enough of those shoppers' needs. Instead, the retailer struggled with spotty in-stock levels and poor execution around supply chain management. These slips contributed to market-share losses as sales rose just 1.5% last quarter compared to Home Depot's 5%. There's been a consistent growth gap between the two companies, but shareholders have good reasons to demand that Lowe's market-share trends at least hold steady. The chain reduced its outlook in each of the last two quarters, and investors are hoping that these growth downgrades don't extend into the start of 2019.

On the bright side, Lowe's has raised extra capital through a store closure and restructuring plan that's removing underperforming locations and brands from its portfolio. The move could support better profitability in time, but so far, investors haven't seen evidence of that happening. Adjusted earnings ticked lower last quarter, while Home Depot's margins inched further into record-high territory.

That financial gap suggests Lowe's might not dramatically alter its capital return plans on Wednesday, even though it currently delivers just 35% of profits to shareholders in dividends compared to 55% for Home Depot. The company needs to get the business back on track before it can start prioritizing sending more cash to its investors.

The outlook

Ellison's first two quarters in the leadership position constituted a mixed bag for shareholders, with poor retailing execution offsetting most of the optimism around his bold restructuring plan. The next fiscal year is likely to clear up that confusion, one way or the other.

If the new CEO is right about Lowe's potential to raise its game to world-class retailing status, then investors should see key metrics like comparable-store sales, operating margin, and return on invested capital start marching higher.

On the other hand, another year of disappointing operating trends would reflect deeper competitive issues tied to product sourcing, pricing, and customer service, that even Home Depot's former executive can't quickly fix. Investors will get an indication of which of those two paths Lowe's is walking when they compare the company's 2019 outlook with that of its larger peer.