The retail sector is absolutely gigantic, with trillions of dollars sloshing around the economy as transactions occur to buy various products and services. Within this massive market, the home improvement industry is also big, with two major players going head-to-head to win over customers in a $1 trillion market.
Home Depot (HD 1.65%) and Lowe's (LOW 1.27%) are the top companies that investors can choose between if they want exposure to this critical part of the economy. They both have competitive strengths, are consistently profitable, and return a lot of capital to shareholders.
So, which of these DIY giants is the better retail stock to buy?
Image source: Getty Images.
Recent struggles
With their sprawling networks of massive warehouse stores, these two businesses are leading choices among DIY customers who want to tackle upgrades and renovations. But it's been a difficult period, as higher interest rates pressure the housing market, discouraging these people from spending on big-ticket items. Both management teams discussed the weakness in discretionary purchase activity.
However, both Home Depot and Lowe's also target professional customers, like contractors, electricians, and roofers, who handle complex projects. This group is faring better than DIYers.
Home Depot has the edge with pros, as 50% of its revenue comes from this valuable customer cohort that typically spends significantly more than DIYers. With its 2024 $18.3 billion acquisition of SRS Distribution and recent $4.3 billion purchase of GMS, this business is pushing aggressively to dominate the pro market. This gives it a huge leg up on Lowe's, which has just a 30% share from pros.
Focus on the big picture
The past couple of years have proven just how much these two companies are dependent on favorable macro conditions to succeed. However, by zooming out, investors will understand that there are reasons to remain optimistic over the long term.
The overall industry provides a favorable backdrop for these businesses. For starters, the median age of a home in the U.S. continues to increase over the years. Older houses will require more upkeep and maintenance.
Then there's the supply and demand imbalance in the domestic housing market, as estimates point to an inventory shortage of millions of homes. This constraint can discourage people from wanting to buy new homes, forcing them to stay in their existing dwellings and invest in renovations.
And lastly, due to the huge increase in the price of homes in the past five years, there are trillions of dollars in untapped equity. Once the macro backdrop becomes more accommodating, there could be huge pent-up demand for Home Depot and Lowe's, especially from DIY customers who have delayed upgrades.
High quality or better valuation?
In my view, Home Depot is the higher-quality business. It operates with much greater scale, as its trailing-12-month revenue of $163 billion is almost double the $83 billion Lowe's generated. And likely partly due to its stronger position among pros, Home Depot registers a higher average operating margin over the past decade.
For what it's worth, Lowe's is trying to close the gap. Its CEO, Marvin Ellison, was an executive at Home Depot before his current gig. And he's focusing on expanding the company's pro division, with a bolstered loyalty program and improving omnichannel experience. Lowe's could have more sales upside simply because it's smaller than Home Depot, and it could target the low-hanging fruit by copying its larger peer's strategy.
As of July 28, Lowe's shares trade at a price-to-earnings ratio of 19.1. That represents a notable 25% discount to Home Depot, which trades at a 25.6 multiple. If I had to guess which stock will generate a better return over the next five years, Lowe's looks like the clear answer.
