The home improvement industry is massive, valued at approximately $900 billion, a number that includes both do-it-yourself customers and professionals. While Home Depot (HD 0.85%), the largest player in the market, gets a lot of attention, smaller rival Lowe's (LOW 0.01%) also deserves a closer look from investors. In fact, Lowe's has produced a better return than Home Depot over the past three-, five-, and 10-year periods.
With that being said, here's what the smartest investors know about Lowe's stock.
Strong operating performance
In the most recent quarter (Q3 2022 ended Oct. 28), Lowe's produced revenue of $23.5 billion, up 2.4% year over year. And adjusted diluted earnings per share (EPS) of $3.27 increased 19.8% compared to the prior-year period. Both of these figures beat Wall Street expectations. What's more, same-store sales jumped 3% in the U.S.
If we zoom out a bit, we'll see a business that has exhibited solid growth over the years. Between fiscal 2016 and fiscal 2021, Lowe's revenue rose at a compound annual growth rate (CAGR) of 8.2%, with EPS increasing at an impressive CAGR of 28.2%. It's no wonder that the stock has done so well.
What particularly stands out about Lowe's growth is the trend in the store count. Five years ago, Lowe's had 2,144 stores. Today, the company's store count totals 1,969, an 8.2% shrinking of the footprint. Lowe's has improved its per-store volume and efficiency to help drive higher sales, as the return on invested capital went from 19.5% to 27.6% in the past five years.
Despite elevated inflation and higher interest rates being on everyone's minds, management felt optimistic enough to raise full-year guidance, "reflecting stronger-than-expected operating results." Fiscal 2022's adjusted operating margin, adjusted diluted EPS, and share repurchases are now expected to be higher than the previous outlook.
Opportunity with Pros
Like Home Depot, Lowe's serves two kinds of customers: do-it-yourselfers (DIY) and professionals (Pros). While Home Depot generates about half of its overall revenue from Pros, for Lowe's, this figure stands at about 25%. Lowe's current CEO, Marvin Ellison, held leadership positions at Home Depot prior to his current gig, so he knows a thing or two about catering to professional customers like contractors and electricians.
It's evident that Lowe's growth opportunity lies with gaining market share among Pros. To this end, management implemented key strategies like updated store layouts, dedicated checkout lines, and a revamped Pro rewards program to help garner interest from this customer segment. In the most recent quarter, revenue from Pros was up 19%, marking the 10th consecutive quarter of double-digit gains from this group.
"We're encouraged to hear that Pros remain optimistic, with over 70% saying that they expect even more work in 2023 than they had in 2022," Ellison noted on the Q3 2022 earnings call.
Returning capital to shareholders
As I alluded to in the beginning of this article, Lowe's stock has beaten its larger rival's returns over the past several years. In fact, shares have soared a remarkable 450% over the past decade. This compares very favorably to the S&P 500's total return of 218% during the same time frame. Even with this rise, the shares currently trade at a price-to-earnings ratio of just under 20.
While this type of stock performance certainly deserves a round of applause on its own, Lowe's has been proactive about returning excess capital to shareholders. The business generated cash flow from operations of $8.1 billion in the first nine months of fiscal 2022. However, it used $12.1 billion of cash to repurchase outstanding stock, which boosted per-share earnings.
Another key benefit of being a Lowe's shareholder is the company's dividend. Lowe's has paid a quarterly dividend since 1980, and it has steadily crept up over time. The current dividend yield is about 1.9%.
