Home Depot vs. Lowe's: Comparing Their Second Quarter Earnings

Second-quarter earnings season is now in the rearview mirror, so it's a good time to take a step back and pick out the winners. In this Fool Live video clip, recorded on Aug. 19, Fool.com contributor Jon Quast gives viewers a rundown of the latest numbers from home improvement retail giants Home Depot (HD -0.31%) and Lowe's (LOW -0.14%). 

Jon Quast: I'm going to stick more in my wheelhouse, which is more of the consumer goods, and talk about Lowe's. We're going to talk about Home Depot as well because it's really hard to get a grasp on what is going on with Lowe's without contextualizing it with Home Depot's results. I think it's also pertinent, I think it's on people's minds because Home Depot reported their financial results, and the stock dropped, and it even dragged Lowe's stock down about 7%. Then Lowe's reported, the next thing you know, it pops something in the neighborhood of 10%. Definitely different reactions from the market on these reports.

If we just look at the numbers, Home Depot, for example, they reported sales of $41.1 billion. That was up 8% year over year, and that beat analyst expectations. This was better growth than what Lowe's put up. Lowe's had sales of $27.6 billion, sales were only up 1% year over year, but this was also ahead of what analysts had expected. Now, if you look at comp sales, Home Depot looks better again. This is your sales compared to the same amount of locations last year. Comp sales for Home Depot up 4.5% in the most recent quarter. Lowe's, their comp sales were down 1.6%. But I think that the market is really contextualizing these results. On a two-year basis, Lowe's comp sales results are actually better than Home Depot's. So last year, Lowe's, their comp sales were up 35%, Home Depot's only 23%. On a two-year basis, Lowe's actually is outperforming. I think that that's something that the market was really looking at.

If you turn to the bottom line, Lowe's reported earnings per share of $4.25, that was ahead of what analysts wanted. Analysts were looking for around four. Home Depot also outperformed. They reported earnings per share of $4.53. Analysts had expected just a little bit less. If you look at these numbers, bottom line, both companies beat analyst expectations on the top line, and on the bottom line. Yet the analyst community downgraded Home Depot stock and they upgraded Lowe's stock.

What's going on there? I think that one of the things that analysts are looking at is the net profitability margin. If you look at Lowe's, they are getting a lot more profitable. In the second quarter of last year, 10.4% net profit margin. This year, 11%. That's actually a pretty substantial jump for a mature company like this on the bottom line. To its credit, Home Depot also improved, 11.7% net profit margin compared to 11.4% last year. They got a little bit better as well.

One of the things that analysts are looking at as well in the whole market is that while sales are up for Home Depot, transactions are down. People are buying less things, but they're buying bigger-ticket items. Thinking about some of the things that have maybe played a part in those bigger-ticket items over the past year, we had all the stimulus money. Nothing on the radar right now for that in coming quarters. The worry is maybe these transactions are falling, but maybe the big-ticket items aren't going to prop up sales in the coming quarters.

If we were looking at these two results, comparing them side by side, maybe we could strain out a minutia of detail and say, which one was better. But bottom line, both of these companies are benefiting from the same macroeconomic trends right now. There is a lot of spending going on. They saw the same growth in the same categories. Bathroom categories were both up for both companies.

But here's one thing that caught my eyes, and I really think people should pay attention with Lowe's going forward. They've had tremendous growth with their Pro customer business over the last couple of years since they've brought in CEO Marvin Ellison from Home Depot. They've been really concentrating on these professional customers. On a two-year basis, they've grown their Pro business 49%. That is at a huge jump. It's always been Home Depot's strength was the Pro customer. Here's a couple of things going on right now when you think about the construction business. There's something called the remodeling market index.

We're not going to get into the minutia of what all the numbers mean, but bottom line, current projects for remodeling are near an all-time high. Backlog of projects is at an all-time high in the remodeling market. Then when you look at new housing permits, according to the census bureau, that is near a 10-year high. These are two tailwinds that are really going to drive pro-customer spending over the next several years, and I really think that Lowe's stands to gain a lot of those sales because of their growth in the Pro customer business, and really could continue to grow those sales per location and help them gain operating leverage.