At first blush, the two retailers look so alike that they almost seem interchangeable. For investors, though, the devil is in the details. Home improvement chains Lowe's Companies (LOW +1.43%) and Home Depot (HD +0.63%) are different enough in ways that matter to investors. One stock is better than the other.
That winning name? Home Depot. Here's why.
Home Depot vs. Lowe's
Don't misunderstand --both retailers have their challenges and both will survive into the foreseeable future. If you already own a stake in Lowe's, there's no immediate need to swap it out for Home Depot stock. If you're currently weighing one prospect against the other right now, however, go with Home Depot.
But first things first. Lowe's operates 1,746 stores, all of which are in the United States. The company did $86 billion worth of business during the fiscal year ended in early February, about three-fourths of which is driven by ordinary consumers like yourself. The other one-fourth comes from contractors and other professionals.
Home Depot is slightly bigger -- at least in terms of its physical footprint -- with its 2,335 locales covering much of North America and a little of Latin America. But it does disproportionately more business than Lowe's, raking in $153 billion in sales during the same 12-month stretch. Roughly half of Home Depot's top line comes from sales to professional contractors -- and that's a detail that matters.
Rekindled demand is on the horizon
Sure, its oversized exposure to the contractor business worked against Home Depot much more than it did Lowe's in 2022 and 2023, with the real estate market's struggle leading to declines in new home construction. Home Depot's same-store sales fell 3.2% last year. That's a lot, by retail standards.
US Housing Starts data by YCharts
Take a step back and look at the bigger picture, though. The current housing headwind is a temporary one. Most economists still expect a handful of interest rate cuts to be made in the foreseeable future despite lingering inflation, which in turn should reignite interest in home buying -- and homebuilding. To this end, the National Association of Home Builders/Wells Fargo Housing Market Index is up nearly 40% since December, reaching an eight-month high and suggesting that homebuilders finally see a light at the end of the tunnel.
And even if the near-term home construction outlook remains wobbly, Home Depot stock is still a long-term buying opportunity. Analysis from Moody's suggests that the nation will still need 1.5 million to 2 million more homes than it will have at the end of this year even if homebuilding activity is strong in 2024. It could take years to close this gap, with homebuilders struggling just to keep pace with population growth.
In a separate but similar vein, Harvard University's Joint Center for Housing Studies says that while the slowdown in home remodels and renovations will likely continue cooling in 2024, the downtrend is also apt to hit bottom this year.
NYSE: LOW
Key Data Points
Money matters
Home Depot's deeper reach with professional contractors isn't the only attribute that makes it a better bet for would-be investors. There's also the benefit of its greater scale and deeper pockets. Home Depot isn't just bigger than Lowe's; it's also more profitable. It banked $15.1 billion worth of net income in 2023 versus Lowe's bottom line of $7.7 billion. With more profits, Home Depot can invest more in its own growth.
And it's done just that. All the way back in 2018, the retailer began investing billions of dollars in new technologies that are still paying proverbial dividends today. These include improved supply chains, web search, e-commerce, and the integration of its online and in-store experiences.
The company's continued making such investments. In early 2023, it earmarked $1 billion for employees' wages, ultimately as a means of improving engagement with customers. And last year it established a $15 billion stock repurchase program, which is an investment in Home Depot stock's value.
Perhaps one of the most aggressive and exciting moves recently has been Home Depot announced plans to acquire SRS Distribution, which offers specialty construction products to professional contractors through a few hundred independently owned stores. It's a brilliant enhancement of Home Depot's already-significant contractor customer base.
None of this is to suggest Lowe's is unable to spend this kind of money. But it would certainly be more difficult for the smaller Lowe's to make these kinds of investments without adversely impacting its balance sheet or other aspects of its business.
NYSE: HD
Key Data Points
Connect the dots
Again, don't panic if you already own Lowe's. It's fine.
Still, know that the little things add up into big things over time. Home Depot's got enough of these little things that Lowe's doesn't to matter to long-term investors. Its sheer size and the makeup of its customer base are two of these "big" little things, with the retailer being particularly well-positioned to benefit from the eventual recovery of the housing market.
This might help seal the deal, so to speak. Newcomers to Home Depot will be plugging into the stock while its dividend yield stands at 2.5%. That's measurably better than Lowe's current dividend yield of 1.8%. Remember, these little things matter more and more as time marches on.
