Home Depot (HD 0.65%) and Lowe's (LOW 0.65%) are the two biggest home improvement companies in the U.S., and they're similar in many ways. For one, they both slightly underperformed the broader market in 2022.
Does this mean they should look the same to investors? Or does one have an advantage over the other?
Does bigger mean better?
Lowe's is actually much older than Home Depot, but Home Depot was built to be a big-box retailer, and it has become a bigger company.
| Company | Store Count | TTM Sales | Average Sales per Store | TTM Net Income | Average Net Income per Store |
|---|---|---|---|---|---|
| Home Depot | 2,319 | $157 billion | $67.8 million | $17.1 billion | $7.4 million |
| Lowe's | 1,969 | $96 billion | $48.8 million | $6.7 billion | $3.4 million |
Data source: Home Depot and Lowe's. TTM = trailing 12 months.
What's clear is that Home Depot is not only bigger in store count, but each of its stores also generates much more in sales, and compared to Lowe's, more than double the net income.
There is another way to present similar data using operating margin:
HD operating margin (quarterly); data by YCharts.
Home Depot operates more efficiently than Lowe's in general, and even more so in the most recent quarter. Let's see why, and how this can help investors decide which is the better stock.
What to expect in 2023
Home Depot went through some growing pains just prior to the pandemic when it invested in expanding its digital capabilities. Net income suffered as expenses piled up and the strategy took longer than expected to implement.
However, it was well positioned to handle the surge in demand for home improvement products at the beginning of the pandemic, and it's still reaping the rewards of its efforts as well as building on top of them with improved solutions. In general, sales growth decelerates in a tough real estate market, but it's enjoying strong sales as people who decide not to buy new homes invest in more home improvement.
Home Depot opened three stores in the 2022 third quarter, with none in the previous two quarters. It typically opens as many as three stores in a quarter, but these days, it's more focused on digital engagement and increasing sales to professional contractors. In the 2022 third quarter, sales increased 5.6%, while comparable-store sales (comps) grew 4.3%.
Lowe's, on the other hand, was not as well equipped at the beginning of the pandemic. However, under new leadership, it caught on pretty fast and had very strong performance.
It recently announced a far-reaching plan to expand its digital approach even more, and improve functioning in many other areas. That should help it capture the same home improvement market as Home Depot. In the 2022 third quarter, net sales increased 2.6%, while comps increased 2.2%.
Lowe's store count has dwindled from as much as 2,100 in 2021 to 1,969 right now. That makes its sales growth even more impressive, and Lowe's strategy right now includes becoming more efficient. It's also focused on enhancing digital sales without the need for physical space.
Dividend and valuation
Lowe's dividend yields 1.4% at the current price, while Home Depot yields 2.4%. Home Depot's dividend has increased in value more than 550% over the past 10 years, while Lowe's has grown almost 390%.
Lowe's stock has outperformed Home Depot's over the past 10 years, despite Home Depot's dominance throughout that time. But over its history, Home Depot has gained many times more than Lowe's despite being on the market for less time.
Today, Lowe's stock is a drop more expensive than Home Depot's, trading at 19.7 times trailing-12-month earnings versus Home Depot's 19.1.
Considering its expansion plans, increasing income, better efficiency, higher dividend, and lower valuation, I call this match in favor of Home Depot.
