Can These Hardware Stocks Ratchet Higher?

AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Home Depot (NYSE: HD) is really pitching woo to the ladies lately and it’s about time. They have been offering ladies only classes like the Do-It-Herself on building an Adirondack chair. For years they have held various DIY how-to workshops, but none specifically for women. Upcoming workshops feature installing a vanity and another with Martha Stewart Living to make a chore chart.

How-to power higher

Singer Sewing Company first held sewing machine classes in the late 1800s catapulting it to the first multinational corporation. Teaching your customer has been a time-honored tradition from companies from Cabela's to Apple.

Getting ladies into the store and seeing the myriad of home decor options is key. Home Goods stores like those of TJX Companies, J.C. Penney, and Restoration Hardware (NYSE: RH) are doing quite well as is Restoration Hardware's stock which only debuted last November, more than doubling. It also showed relative strength on the market selloff of Wednesday and Thursday, just dipping .03%.

Hardware store stocks get a lot of press before news of major weather disasters. With above average hurricane activity expected Home Depot will be offering free preparedness workshops in 700 stores.

However, investors need to be concerned about the day to day performance more than extraordinary weather. A housing recovery is crucial to these retail hardware companies; witness their sagging after the Fed taper announcement. The third leg of the stool is really the homeowner and "honey-do" home improvement projects. Home Depot has had an ongoing advertising campaign with one in particular showing how to make a cascading floral planter. We ladies love our flowers.

Home Depot's rival Lowe's (NYSE: LOW) has offered online design it yourself options for over a year to attract the custom of ladies. Their Virtual Home Designer allows anyone to play with colors and fixtures, flooring, and paint to makeover a room with options available in-store.

Canadian comic and duct tape proselytizer Red Green used to say," If women don't find you handsome, they should at least find you handy." More and more households are headed by women; they can't rely on anyone handy but themselves. Home Depot and Lowe's need to play to this trend more to stay relevant.

While they don't have the big data to target an upcoming blessed event like Target does or some other life change, like first home, first apartment, both could offer workshops addressing these major rites of passage for both men and women.

Do these stocks need a little duct tape?

Both Lowe's and Home Depot performed worse than the Dow on the big selloff. Home Depot has fallen almost 10% from its all-time high of $81.56 on May 22. Home Depot, the world's largest home improvement retailer (although only in North America) is now at a trailing P/E of 24.10 with a 2.00% yield. Lowe's too is down nearly 10% from its high.

While Lowe's is trading at a 23.45 trailing P/E with a 1.80% yield, it has generally been considered the lesser of these. However, on June 19, it agreed to buy much of the assets of bankrupt Orchard Supply Hardware stores, a chain of 89 California hardware stores, for $205 million cash plus settlement of some supplier accounts.

Orchard, formerly spun off from Sears, carries Craftsman tools and Kenmore Appliances, still considered the legacy quality brands that Sears owns. By mid-August when Orchard appears in bankruptcy court investors should know if Lowe's will get to carry those name brands.

As both Lowe's and Home Depot expand online with ship to store options they are forgetting why anyone goes to a hardware store in the first place, how-to advice. If a customer is getting anything but a standardized item they won't go to Amazon; they are going to need help.

As Home Depot said on the Q1 call on May 29, "We continue to work toward and expect to achieve our goal of having 60% of our store labor hours dedicated to customer-facing activity by the end of fiscal 2013." In real person speak employees may actually start helping more customers find stuff. This might help raise same store sales from 4.3% and in particular, the anemic 0.10% increase in comparable store customer transactions. Home Depot isn't physically expanding bricks and mortar to any appreciable extent with only a single new store in Mexico in the quarter.

Lowe's, too, could make shopping, especially for home design items, an experience more like Restoration Hardware (while still keeping some of the handyman machismo). Lowe's has the lowest PEG of all three at 1.14, with Home Depot at 1.44 and Restoration Hardware at 1.85. Gross margin in the mid-30s is similar to Home Depot but return on equity at Home Depot is twice as good at 27.95% to Lowe's 13.86%.

To be clear, Restoration Hardware is not a hardware store, but more of a design center with fixtures, appliances, lighting. It carries many decor-related things the home improvement stores do but pricier. It only has 84 stores including 14 outlets in the US compared with Home Depot's 2,257 in North America and Lowe's 1,755 also in North America.

It recently reported much improved numbers from the year ago with Q1 net revenues up 38%, same store sales up 41%, and adjusted diluted earnings per share of $0.06 compared to a loss of $0.04 in Q1 2012. The company guided higher for EPS to the $0.40-0.42 range for Q2, which would be a substantial uptick.

Insiders have been selling to the tune of $56 million in May, including the Chairman, CEO, COO, and CFO. While its fortunes have improved its run up and insider selling are screaming red flags. It also has a large short interest and little institutional support at only a15% hold.

Who wins?

I prefer Home Depot of all three as it is finally making the effort to win over women with workshops and desperately needed improvement to customer service. Restoration Hardware's stock may be on fire but it's too hot to handle.

With such similar metrics on Lowe's and Home Depot it's hard to pick a winner especially if Lowe's gets to carry those Sears brands; that could move the needle. Home Depot still wins as it woos the women.

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AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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