Where Could Lowe’s Outdo Home Depot?

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When it comes to the home improvement industry, few look beyond Home Depot (NYSE:HD) and Lowe’s (NYSE:LOW). These two conglomerates have been the industry leaders and close rivals for decades now. Both stores are similar in a lot of ways, in that they target similar customers, operate across the same markets, sell similar products, and use similar channels to sell their products. In spite of these similarities, Home Depot takes the leading position in the market and is expected to continue garnering growth as the U.S. housing market continues to recover. However, here are some factors where Lowe’s stacks up better in comparison to Home Depot, which could lead to better performance in the future.

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Figure 1: Home Depot and Lowe’s Stock Quote, NASDAQ

 

Going back to the basics, Lowe’s entered the home improvement market almost 30 years before Home Depot, which had already given it some kind of historical advantage. However, Lowe’s entered the big box store format later than Home Depot. In spite of this, the two retailers have knowingly or unknowingly cemented their niche — Lowe’s for more aesthetically driven purchases, such as patio sets, and Home Depot for more mechanical purchases, such as tools. And the format of the stores exactly resonates this — Home Depot with its orange and black color scheme and tall shelves, and Lowe’s with its blue and white color scheme. Clearly, if Americans continue to pay more attention to the aesthetic quotient of their homes, and this is a possibility as the proportion of home owners increase, Lowe’s could be a bigger beneficiary.

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Next, let’s look at Lowe’s and Home Depot’s strategy. Since the recession, Home Depot has focused on garnering revenue growth through productivity maximization. This entailed a focus on customer satisfaction, optimum shelf space utilization, and non-performing store closures. However, productivity maximization could have a threshold. And here is where Lowe’s might see higher comp sales increases in the future. Unlike Home Depot, Lowe’s has been rapidly expanding its geographical footprint, leading to the creation of new revenues. Over the last four years, while Home Depot added 17 new stores, Lowe’s has added close to 95 stores. If Home Depot is currently benefiting from the skewed housing market recovery in the U.S., where states such as California and Florida have been recovering faster than others, there may come a time in the near future when Lowe’s is just as prepared to capitalize on these trends.

storecount

Source: Statista

 

Third, let’s look at Home Depot and Lowe’s financial standing. One big factor that comes into play here is the debt levels of the two retailers. Long term debt levels for Home Depot stood at ~$ 16.87 billion in 2014. In comparison, the metric stood at ~$10.82 billion for Lowe’s. Since 2012, Home Depot’s debt levels have undergone increases at rates of ~55% and ~15% over 2013 and 2014, respectively. Clearly, these numbers indicate that Home Depot might have to leave leeway to budget for future interest payments, going forward, which could put Lowe’s in a better financial standing.

In conclusion, these are merely three factors that suggest areas where Home Depot might lose out to Lowe’s. However, this does not contend Home Depot’s leading position in the U.S. home improvement market, since there are a number of other relevant spheres where Home Depot holds a better comparative standing. Either way, both names have undergone phenomenal growth in recent times, and the upbeat projections for the U.S. housing market could well ensure new heights for the two names in the future.

We have a price estimate of $79 for Lowe’s stock, which is above the current market price.

See our complete analysis of Lowe’s here

We have a price estimate of $123 for Home Depot’s stock, which is almost in line with the current market price.

Our complete analysis for Home Depot’s stock

Sources:

  1. Home Depot 10-K, SEC
  2. Lowe’s 10-K, SEC
  3. Home Depot Vs. Lowe’s: The Home Improvement Battle

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