Home Depot or Lowe’s?
Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In a recent article, I had talked about the home building industry which has been exhibiting signs of a potential recovery. Companies such as Home Depot (NYSE: HD) are highlighting the fact that the industry has been improving, even though it is slow. But on the other hand, there are companies which are betraying the trend with their lackluster performance, the reasons that are not limited to weak consumer spending.
The obvious guess here is the second quarter earnings posted by Lowe’s Companies (NYSE: LOW), which puts a question mark on the recovery. But a prudent investor does not stop here. Let us understand what happened.
Comparison of Opposites…
The two home improvement retailers have been worlds apart in their execution and efficiency. Lowe’s registered results which were below market’s estimates with revenue of $14.25 billion, 20% below last year’s level. Though earnings look flat, but this is due to a lower number of shares outstanding during the reported period. The retailer witnessed weak demand for its products and its cost cutting strategies also fell flat without begetting any positive result.
On the other hand, Home Depot experienced a smooth and a successful quarter, with results beating estimates and the stock price rising. It experienced improved demand for its products and its cost saving initiatives worked, affecting its bottom line favorably. Hence, Home Depot could easily manage to snatch away Lowe’s market share which came as a big hit to the latter.
In order to save its losing credentials, Lowe’s has been planning to expand its presence in Canada. It recently attempted to buy Rona, but its offer was rejected by the Canadian retailer as they considered the bid to be low. Acquiring Rona would have acted as a strong weapon in Lowe’s arsenal since the Canadian retailer is the largest home improvement retailer in the region. But things seem to be not working for Lowe’s.
In fact, Lowe’s has been trying to shrink its size. It has put a halt to expansion plans and has been closing stores in order to curb costs. The restructuring also involves several job cuts which are now weighing on the cost structure. This comes in sharp contrast with Home Depot which is merrily planning expansion into new regions such as Mexico.
And The Comparison Is Endless
Home Depot beats Lowe’s on many metrics such as same store sales growth, which is a key tool for gauging a retailer’s health. Home Depot registered a 2.1% growth while Lowe’s could not manage a positive same store growth metric.
Moreover, Lowe’s has cut down on its promotions and discounts which are the major attractions for consumers in a tough economic environment. This has influenced customers greatly, resulting in customers moving away from the retailer. Weak demand and a huge cost burden have forced Lowe’s to lower its outlook for the year, denting investor confidence especially when its rival is posting better results, seeing growth opportunities, while having a bright outlook to look forward to.
Clearly, Lowe’s has been on the losing side and not much improvement can be seen till now. The main problem with Lowe’s is it cannot attract customers and has experienced lower demand for its products whereas Home Depot enjoys market leadership and great customer attention. Moreover, Home Depot results also included increased demand for high end products which will boost its margins coupled by cost saving initiatives. Lowe’s margins have been shrinking in spite of a huge turnaround program already in place.
There seems to be no positive news coming in for Lowe’s and it is better to stay away from this retailer. But if you wish to make your bet on the industry then Home Depot is definitely a star that is a much safer for your portfolio.
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