Lowe's (LOW 2.89%) is still outgrowing the booming home improvement industry. The retailer last Wednesday announced third-quarter earnings results that closed the sales and profitability gap with Home Depot (HD 2.62%) as both companies benefit from surging consumer interest in home upgrades.
Lowe's Q3 metrics extended the retailer's streak of competitive wins and suggest it may be building durable advantages in areas like e-commerce and the pro contractor niche.
Let's take a closer look.
Comparable-store sales gains landed at 30%, which was a slowdown from the prior quarter's soaring 35% spike. Yet that growth result was higher than Home Depot managed for the period and was significantly above Wall Street expectations. Lowe's has now added $13 billion, or 23%, to its annual sales base over the last nine months. Home Depot's comparable figure is 18% in the first three quarters of 2020.
Management said the gains came from every product area and were particularly strong in the digital sales channel. "We delivered over 15% growth in all merchandising departments, over 20% growth across all geographic regions, and triple-digit growth online," CEO Marvin Ellison said. Ellison used to be a top executive at Home Depot and has been aiming to establish Lowe's as a more consistent peer to the industry leader.
Lowe's executives highlighted rising expenses, especially around wages, just as Home Depot did earlier in the week. But the retailer still managed to increase profitability and close the earnings gap with its bigger competitor.
Gross profit margin ticked up to 33% of sales from 32% a year ago. Operating margin rose to 9.75% from 9% but remains well below Home Depot's 14.5% figure.
Lowe's had some important updates on the capital allocation front, having restarted its stock repurchase program while lowering its interest expenses by taking on new debt and paying off older bonds. The moves leave the company in a flexible position to navigate what could be a tough period ahead if economic growth trends don't rebound quickly. Lowe's has over $8 billion of cash on hand and immediate access to an additional $3 billion if needed.
A new outlook
Ellison and his team have seen enough data to provide some short-term operating forecasts even though the industry is still seeing unprecedented volatility. Sales are expected to grow by between 15% and 20% in the fourth quarter and operating margin should hold flat as the retailer spends aggressively on COVID-19 related expenses and on strengthening its supply chain. "We are making the right strategic investments to deliver sustainable, long-term growth," Ellison said.
It will take a few more quarters of strong sales and margin trends to show whether that optimistic outlook pans out. Home Depot isn't going to shrink from competitive challenges, and investors can see that determination from the company's recent $8 billion acquisition in the growing maintenance, repair, and operations niche.
Yet Lowe's seems to have the resources it needs to maintain or even extend market share during this current cyclical industry boom. Success there would be a big step toward management's goal of crafting a world-class operating platform that can sustainably compete with the best retailers around.