Email this article Format for printing Receive via handheld

Home Depot, Lowe's Nail Q2

The world's largest home improvement retailer and its closest competitor -- Home Depot and Lowe's, respectively -- reported their Q2 results this week. Both had solid sales and earnings growth, but in terms of margins and inventory turnover, Home Depot wins again. The company is trading at premium compared to Lowe's, and certainly has a history of excellent operations. The question investors should be asking is why Home Depot trades at such a premium and whether it's worth the price.

By LouAnn Lofton (TMF Lou2)
August 15, 2000

Home Depot (NYSE: HD) and Lowe's Companies, Inc. (NYSE: LOW) both reported solid second-quarter results this week. Home Depot, which is a NOW 50 member, is the largest home improvement retailer in the world, and Lowe's is second behind it. Let's take a look at the nuts and bolts behind each company's quarter, then see how they square off against each other.

Home Depot's sales increased 21% to $12.618 billion. Same-store sales grew by 6%. Net earnings went from $679 million in Q2 of last year to $838 million this year -- an increase of 23%. As of July 30, the company operated 1,011 stores, with about 109 million square feet of selling space.

Home Depot's stock is taking a beating today, trading down close to 10%. The company met earnings expectations -- as opposed to beating them -- for the second consecutive quarter, and the street didn't approve, despite the company's continued excellent results. Investors should evaluate this as just market noise, though. The company's long-term outlook hasn't changed.

For Lowe's second quarter, sales grew 19% to $5.26 billion. Same-store sales increased by 3.7%. The company's net earnings went up by 21% to $279.6 million, from $230.2 million last year. The total number of stores in operation as of July 28 was 604, and Lowe's retail space grew to about 60.9 million square feet.

Margin comparison
How about we start by comparing margins between the two retailers? Home Depot's gross margin for the quarter was 29.6%. Lowe's was 27.5%. A similar disparity can be found in the companies' net margins. Home Depot's was 6.64%, while Lowe's was 5.3%. With retailers like Home Depot and Lowe's, though, which sell goods at low costs and make up the difference through volume, inventory turnover is perhaps more important than margins.

Inventory turnover
For its second quarter, Home Depot turned its inventory over every 45 days -- or twice during the quarter. Lowe's was able to turn its over every 54 days -- or 1.66 times. The quicker a retailer can turn over its merchandise, the quicker it can stock up again and sell more, so Home Depot's numbers are more attractive than Lowe's for this measure, too. These numbers didn't change much compared to the second quarter of last year for both retailers.

Home Depot's still the king, and is priced like one
Lowe's is still the second fiddle to Home Depot. Home Depot commands a valuation premium over Lowe's, trading at a P/E of around 55, compared to Lowe's 23. Its sheer size and earnings power are part of the story, but it continues to turn up ahead of Lowe's in other key categories such as inventory turns and return on equity. (Home Depot's return on equity is 21%, compared to Lowe's 16%.)

Home Depot's sales growth and earnings per share growth over the last five years also outpace Lowe's results. Home Depot's sales grew over the last five years by about 25%, while Lowe's grew by 21%. Home Depot's earnings per share grew by 27%, compared to Lowe's earnings per share growth of about 20% for the last five years. While both companies turned in another round of respectable quarterly results these past two days, Home Depot showed once more why it's the big dog.

However, some investors are likely to question whether Home Depot shares deserve such a big premium over Lowe's shares. Check out this article by Fool Zeke Ashton that discusses this very concern, with the help of a fun little formula designed to figure out growth duration.

Your Turn:
What do you think, Fool? Why does Home Depot continue to operate a better business than Lowe's? What does it do differently? Talk about it with other Fools on the Home Depot discussion board. Or if you're brave, take it to the Lowe's discussion board.

Suggested Links: