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Lowe's Closes In on its Biggest Rival

By Demitri Kalogeropoulos - Mar 1, 2021 at 8:26AM

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There's less space between Home Depot and Lowe's after the pandemic scrambled industry trends.

It is usually Lowe's (LOW 3.69%) slowest sales period of the year, but the fourth quarter still brought an additional $4 billion to the retailer's sales base. It closed out 2020 by gaining ground against Home Depot (HD 2.75%), too.

Meanwhile, Lowe's said in its earnings report this week that it expects another year of improving market share and rising profitability in 2021, even though the outlook is cloudy thanks to the ongoing pandemic.

Let's dive right in.

Contractors install flooring.

Image source: Getty Images.

Winning where it counts

Lowe's growth slowed from the third quarter, as management had predicted it would. But the chain still managed to outperform peers for a third consecutive quarter. Comparable-store sales gains landed at 28% versus the 25% boost that Home Depot announced a day earlier. For the full year, Lowe's added $17 billion to its revenue base, equating to a 24% surge. Home Depot added $22 billion to its base, but that boost translated into a more modest 20% increase for the year.

Lowe's growth wins were broad-based, with sales jumping in each of its core merchandise segments and revenue more than doubling in the online channel. "Strong execution enabled us to meet ... demand driven by the continued consumer focus on the home," CEO Marvin Ellison said in a press release. "I am pleased with our progress in 2020," he continued.

Profiting from the boost

Lowe's didn't have to sacrifice profitability to win that market share, either. Gross and operating margins both increased significantly in 2020, which pushed pre-tax earnings up to $7.7 billion from $5.6 billion. Its core profitability is still lower than Home Depot's, but that gap is closing.

LOW Operating Margin (TTM) Chart

LOW Operating Margin (TTM) data by YCharts.

Lowe's generated over $11 billion in operating cash for the year -- more than double 2019's haul. That success supported dividend payments, stock buybacks, and rising investments into the business. The chain delivered $6.7 billion in cash returns to investors compared to $5.9 billion last year.

Rocky results ahead

Lowe's joined Home Depot in declining to issue a specific outlook for 2021. Sales comparisons will start looking wild in the first quarter that a year ago marked the start of the pandemic's early impact in the U.S. market.

Lowe's still sees a potentially flat or declining industry in the full year as the surging demand for home upgrades eases. It predicts another year of market-share gains even in that environment, though, and promised investors that profitability will keep climbing from its current 10% rate.

While they watch to see if the industry's second-biggest player can keep closing in on Home Depot, shareholders can expect to see gushing cash returns this year. Investments in the business are slated to rise, but Lowe's is still targeting $9 billion of stock buybacks this year compared to $4.7 billion in 2020 and $4 billion in 2019.

The retailer is far from achieving those aggressive goals. Yet, heading into 2021 it has better growth and profitability momentum than the industry leader. Those successes, plus the promise of surging cash returns, might give Lowe's stock a good shot at outperforming Home Depot for a second straight year.

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Stocks Mentioned

Lowe's Companies, Inc. Stock Quote
Lowe's Companies, Inc.
LOW
$182.84 (3.69%) $6.51
The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
HD
$283.00 (2.75%) $7.58

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

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