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Lowe's Closes In on Home Depot

By Demitri Kalogeropoulos – Aug 21, 2019 at 11:51AM

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Lowe's comps topped Home Depot's for the quarter.

Lowe's (LOW -0.45%) investors have been hoping for a rebound, but execution stumbles and restructuring challenges got in the way last year and impacted the start of 2019, too.

This week, the retailer finally showed progress in its recovery as Marvin Ellison, a former Home Depot (HD -1.44%) executive, steers the company during his first full year as CEO. The results in the quarterly report didn't indicate significant market share gains against Lowe's chief rival, but they did show a closing of the operating gap between the two retailers.

 Metric

Q2 2019

Q2 2018

Change

Revenue

$21 billion

$20.9 billion

1%

Net income

$1.7 billion

$1.5 billion

11%

Earnings per share

$2.14

$1.86

15%

Data source: Lowe's.

What happened with Lowe's this quarter?

Sales growth decelerated only slightly when compared to the prior quarter, which was a win considering major pressures like the falling price of lumber and increased tariffs. Lowe's also achieved higher profitability after struggling in this area for the better part of a year. 

A man inspects a piece of lumber in a home improvement store

Image source: Getty Images.

The key highlights of the quarter:

  • Sales at existing locations rose 3.2% to hold roughly steady with Q1's gain. The result marked Lowe's second straight quarter of faster growth than Home Depot, which earlier in the week announced a 3% comparable-store sales increase.
  • Gross profit margin dipped to 32.1% of sales from 33% a year ago, but that decline was mostly due to volatility in lumber prices. Home Depot's comparable metric fell slightly as well, down to 33.8% of sales.
  • Lowe's kept selling expenses in check, leading to higher operating earnings as operating income improved to 11.3% of sales from 10.4%. This drove an 11% increase in net income.
  • Management spent $2 billion repurchasing shares, more than doubling the spending pace of the prior quarter. The lower outstanding stock base supported 15% higher per-share earnings.

What management had to say

Ellison said Lowe's overcame several challenges to execute well during the key spring selling season, especially with the professional contractor niche. "Despite lumber deflation and difficult weather," he was quoted as saying in a press release, "we are pleased that we delivered positive comparable sales in all 15 geographic regions of the U.S."

Ellison went on to say that this success is evidence of a strong economy and also shows that the chain's rebound plan is working. "This is a reflection of a solid macroeconomic backdrop and continued momentum executing our retail fundamentals framework," the CEO stated.

Looking forward

Lowe's affirmed its full-year sales outlook just a day after Home Depot lowered its own projection. The retailer still sees comps rising by 3%, while its rival reduced its prediction to 4% growth from its prior 5% target.

Lowe's reaffirmed its earnings outlook, too, and the chain still sees adjusted operating margin rising slightly. The company says earnings remain on track to improve to between $5.45 and $5.65 per share. Achieving that forecast would still leave profitability well below Home Depot's market-leading position, but it would represent an important step toward closing the financial gap between the two retailers.

Demitrios Kalogeropoulos owns shares of Home Depot. The Motley Fool has the following options: long January 2021 $120 calls on Home Depot. The Motley Fool recommends Home Depot and Lowe's. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Lowe's Companies, Inc. Stock Quote
Lowe's Companies, Inc.
LOW
$187.28 (-0.45%) $0.85
The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
HD
$267.04 (-1.44%) $-3.90

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