Lowe’s Still Worth $34 Though Trails Home Depot’s Recovery

HD: Home Depot logo
Home Depot

Home improvement retailer Lowe’s (NYSE:LOW) continues to trail its larger competitor Home Depot (NYSE:HD) in terms of comparable store sales and margins. Even though both the companies missed market expectations in their latest quarterly results, Home Depot seems have handled the difficult housing market and slow demand recovery better with successful cost-cutting and efficiency initiatives, store remodels, improved service and better pricing strategies. At the same time, Lowe’s ‘Everyday Low Pricing’ strategy has yet to catch customer’s attention and has been putting a strain on margins and same store sales.

See our complete analysis of Lowe’s here

Lowe’s Continues To Trail Home Depot

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Lowe’s grew sales during 2007-08 compared to a 15% sales decline at Home Depot by growing square footage (Lowe’s added 115 stores in 2008, 3x that of Home Depot). The shares of Home Depot began to outperform Lowe’s in 2010 as Home Depot began posting better comp results and margin improvement than Lowe’s. Home Depot has been able to maintain this gap ever since and has resulted in the relative outperformance of its stock.

In the most recent quarter (Q1 2012), Lowe’s comp gap with Home Depot further widened by more than three percentage points, primarily due to Lowe’s disruptive decision to move away from promotions and discounts and towards ‘Everyday Low Prices’. Home Depot has benefited from this disruption as it continues to increase market share while Lowe’s undergoes its transition. Note, Lowe’s comps were partially negatively impacted by a calendar shift where its previous fiscal year had one extra week than the current fiscal year.

‘Everyday Low Pricing’ Yet To Gain Traction

In 2010, Lowe’s operating margin slightly improved to 7.3% as the firm began implementing cost-cutting, supply chain optimization and other efficiency initiatives. However, it again declined to 6.5% in 2011 in part due to the ‘5% off every day’ promotions for Lowe’s credit cardholders and costs related to store-closures and other discontinued projects. Lowe’s has recently decided to move away from promotions and towards ‘Everyday Low Prices’ to establish itself as the retailer offering the most competitive prices. Customers have so far been slow to pick up on the changes and nuances of the latest pricing strategy, but this may change if Lowe’s succeeds in popularizing its pricing among customers. Lowe’s should continue to fare poorly versus Home Depot over the next few quarters as it continues to work through its various pricing and store initiatives.

Focus On Online Sales With MyLowe’s

Despite losing market share to Home Depot on retail locations, Lowe’s has been more proactive on its online sales strategy. Online retail has been an emerging threat to brick and mortar retailers forcing both Home Depot and Lowe’s to make significant investments in online initiatives. Lowe’s online sales platform ‘MyLowes’ has been the cornerstone of Lowe’s turnaround strategy to regain market share, offering customers online tools to manage their home improvement projects from conception and planning to execution via extensive interactive content and state-of-the-art technology.

Nonetheless, while Lowe’s is pinning hopes on increasing traction from MyLowe’s and Everyday Low Pricing to regain its market share, the impact of these initiatives remains to be seen. In the near term we believe that Home Depot will continue to outperform Lowe’s in terms of comps and margin expansion.

We have a $34 Trefis price estimate for Lowe’s stock, 10% ahead of the current market price.