Lowe's (LOW -0.46%) recently announced fourth-quarter earnings, which came one day after Home Depot (HD -0.40%) issued its quarterly update. And except for in one area, Lowe's entire report followed the trend of lagging behind the industry leader.
Sure, the home improvement giant trounced management's earlier forecast for 2021's sales and earnings while winning market share in key industry niches like pro contractors. But Lowe's couldn't close the operating gap with its main competitor even as it looks to cross $100 billion of annual sales in 2022.
Let's dive right in and take a closer look at the two reports in comparison.
Image source: Getty Images.
Sales trends
Lowe's revenue gains landed at 5% for the quarter, translating into a 35% spike on a two-year basis. That success allowed Lowe's to add roughly $28 billion, or 39% to its annual sales base since 2019.
But Home Depot outshined Lowe's here, with sales rising 8% for the quarter and 11% for all of 2021. The industry leader tacked on $40 billion, a 36% increase, to its yearly sales in the past two years.
The competition is fiercer in the professional contractor niche that both companies have targeted as a critical growth avenue. Lowe's said its pro sales were up 23% in Q4. Home Depot didn't break out that figure precisely, but management said in a conference call that big-ticket purchases of over $1,000, a good proxy for pro sales, were up 18%.
Margin changes
Both Lowe's and Home Depot reported rising profit margins even as the retailers spent more cash on wages, employee bonuses, transportation, and merchandise. Lowe's CEO Marvin Ellison credited a "relentless focus on productivity and enhanced pricing strategies" for its success. Yet the gap between the two companies didn't change, as shown in the chart.
LOW Operating Margin (TTM) data by YCharts
Lowe's pushed its operating margin up to 12.6% of sales from about 11%, and Home Depot still sets the industry pace after having hit a profitability high of 15% of sales.
The outlook
Both companies projected essentially flat sales in 2022 following two years of phenomenal growth. For Lowe's, that means revenue will land at about $100 billion, roughly one-third below Home Depot's $150 billion level.
Operating margin will edge higher though, perhaps to as much as 13% of sales. Home Depot is expecting its margin to hold steady at about 15.2% of sales, suggesting this is one area where Lowe's will close the financial gap with its rival.
For investors choosing between these two stocks, the cash return trends are another area to consider. While Home Depot is pairing stock repurchase spending with a quickly rising dividend, Lowe's focuses more on stock buybacks. Home Depot just hiked its dividend by 15% after boosting it by 10% last year. Lowe's won't announce its next annual dividend until just after its first-quarter report in May.
But soaring earnings means there's room to raise that payout following 2021's 33% hike. The retailer's rising profit margin might even convince management to consider boosting its payout goal, which sits at roughly 35% of annual earnings compared to Home Depot's 55% target.
A shift there might make Lowe's a more attractive dividend stock, even if Home Depot continues to outshine the business in most other operating and financial metrics.
