Home Depot vs. Lowe’s: It’s No Contest

Q2 numbers just confirm a longer-growing trend

By James Brumley, InvestorPlace Feature Writer


“Anything you can do, I can do better. I can do anything better than you.”

If companies could sing, that’s the taunting tune The Home Depot (NYSE:HD) would be singing to Lowe’s Companies (NYSE:LOW) right now after last quarter’s earnings results. Although it’s no huge secret that Lowe’s has been forced to work a little harder than its bigger rival just to keep up, last quarter’s numbers might finally have identified which is the contender, and which is the pretender.

That’s not even the most interesting aspect of this two-horse race, though. No, what’s most worth exploring is why these seemingly identical companies are generating such different results.

But, first things first:

By the Numbers

Not that they’re the whole story, but Q2’s results — as is always the case — are a reflection of what’s going on behind the scenes. So, for perspective …

Last quarter, Home Depot’s per-share profit was $1.01 last quarter. That was considerably stronger than the year ago number of 86 cents and topped forecasts of 97 cents. Better still, total revenue was up 1.7%, while same-store revenue was up 2.1%. And the same-store sales number is the key, as it doesn’t let store openings or closings skew the numbers higher or lower. Said another way, it’s a true apples-to-apples comparison.

On the flip side, Lowe’s posted per-share income of 68 cents last quarter, flat from last year and 2 cents shy of expectations for 70 cents this time around. Worse, total revenue fell 2%, which is forgivable in that the company made the tough decision of closing 27 stores between the second quarter of last year and the second quarter of this year. Problem is, although the company cut bait of what one would presume are the 27 weakest units, same-store sales still slumped by 0.4%. It’s not a huge decline, but considering the housing market is supposed to be stronger — not to mention the fact that Home Depot managed to grow its bottom line — it’s a big, fat red flag.

But wait — it gets worse.

To pour salt in Lowe’s wounds, Home Depot inflated its full-year profit forecast from $2.90 to $2.95 when it unveiled last quarter’s earnings. In contrast, Lowe’s lowered its full-year profit outlook, from $1.83 per share to $1.64.

No wonder LOW took an almost 6% hit on Monday when it released last quarter’s numbers. Likewise, no wonder HD is having no problem hitting new multi-year highs.

But Why?

Pretty amazing, isn’t it, that two home improvement retailers cut from the same cloth can show such disparate outcomes?

Lowe’s supporters will be quick to point out one quarter does not make a trend, and that Q2 might have just been a run of bad luck. Those same supporters also will note that Lowe’s has shifted away from a policy of frequent, heavy discounts and promotions toward everyday value pricing. The knee-jerk reaction is the feeling that if there’s no weekly sale flyer in the mail, there’s no reason to go to Lowe’s. But, once customers are ‘trained’ on the new pricing model, business will revive.

Maybe. Yet, all big trends start out as small ones.

Lowe’s might want to quickly learn a lesson from J.C. Penney (NYSE:JCP), which made the same decision earlier in the year to scrap the “sale of the week” tactic and just offer sale prices all the time … and train the customer on the new approach. It has been nothing less than a disaster, simply because consumers love the feel of a sale, or a coupon. Now Penney is having a tough time stopping the bleeding.

Either way, if you take a closer look, you’ll find Lowe’s woes aren’t exactly new. Lowe’s year-over-year growth comparisons have paled relative to Home Depot’s for six quarters now. And last quarter was the fifth consecutive quarter that gross margins narrowed for Lowe’s.

Since the difference between cost of goods sold and the price at which they’re sold is the biggest factor in how profitable a retailer is, if that’s not going well, then everything else the company is doing to squeeze margins out of sales is inherently an uphill battle.

All that being said, the reasons for the lag are irrelevant. Lowe’s is simply not participating in the housing rebound as firmly as Home Depot is, and more than a year’s worth of data confirms it. It just didn’t become obvious until Q2, when Home Depot’s dominance in the arena actually pushed Lowe’s backward.

Problem is, there’s no quick fix for Lowe’s problems at this point.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2012/08/home-depot-vs-lowes-its-no-contest/.

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