Home Depot (HD 0.99%) and Lowe's (LOW 1.42%), the two leaders of the home improvement industry, compete with each other directly, selling everything you'd need to complete a renovation project. Both are massive companies serving the same end customers, but one of these businesses has a very important edge over the other.
There's one key reason why Home Depot is a better business than Lowe's. Let's take a closer look.
Serving professional customers
In its most recent fiscal quarter (ended Oct. 31), Home Depot generated almost half of its total sales from professionals (or Pros). Lowe's, on the other hand, gets about 25% of revenue from professionals.
These important customers include contractors, plumbers, electricians, and the like who view the home improvement chains as mission-critical partners to help them run their own small businesses. Because they visit stores more frequently and tend to spend more compared to DIY customers, Pros drive improved economics for each business.
For example, over the past 12 months, Home Depot's gross margin (33.7% versus 33.1%) and profit margin (10.8% versus 8.6%) were both higher than Lowe's. These percentage differences may not seem like a lot, but when you consider the fact that Home Depot's trailing-12-month sales totaled $147.7 billion, it adds up.
Having a higher proportion of the company's customer base represented by Pros is extremely lucrative because it leads to repeat purchase behavior from a very sticky group. Contractors need a supplier partner that they can rely on to have the right tools, supplies, and equipment to help them get their jobs done. And once a relationship starts, it's unlikely they'll switch providers.
What's more, location is critical, as it allows these Pros to save time when moving between a store and work sites. An incredible 90% of the U.S. population lives within 10 miles of a Home Depot location, helping the business become a top choice for Pros.
With this in mind, it's no wonder that Home Depot's sales per square foot in the latest quarter of $587 was significantly greater than the $440 for Lowe's. Return on invested capital at Lowe's (30.1%) was also drastically lower than Home Depot's (43.9%).
Again, having higher-value, higher-transacting, and more frequent visits leads to greater store productivity. Because of this situation, Home Depot is able to produce a greater return for every dollar reinvested back into the business, a true sign of its superiority.
The future should resemble the past
Lowe's current CEO, Marvin Ellison, spent 12 years in senior-level roles at Home Depot before his current position. That experience has certainly shaped Lowe's current strategy of investing heavily behind boosting its standing with professional customers.
Initiatives like more intuitive store layouts, improved customer service and inventory availability, and adding a loyalty program have helped grow Pro sales 16% year over year and 43% on a two-year basis in the most recent fiscal quarter. Lowe's should've been doing this years ago, so it's still playing catch-up to Home Depot.
Home Depot is expected to report fiscal 2021 fourth-quarter financial results on Tuesday, Feb. 22, with Lowe's expected to report the day after. Although the latter is making solid progress to gain market share with valuable professional customers, investors shouldn't be surprised to see the former remain well ahead in this category.
It's what has made Home Depot a better business historically, producing superior financial metrics, something that I see no reason to believe won't continue in the years ahead.