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The Home Depot, Inc. (HD) Rises As Lowe’s Companies, Inc. (LOW) Struggles

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The world’s largest home improvement retailer, The Home Depot, Inc. (NYSE:HD) has recently reported better-than-expected quarterly results on the back of a housing recovery. The company has started its fiscal year with a positive note and with a positive outlook; it is expecting further improvements in the future. This comes following disappointing results from its biggest rival Lowe’s Companies, Inc. (NYSE:LOW), the world’s second-largest home-improvement retailer, which missed both top- and bottom-line estimates.

The Home Depot, Inc. (NYSE:HD)

Home Depot beats expectations

The Home Depot, Inc. (NYSE:HD)’s revenue rose 7.4% to $19.1 billion while its income increased by an impressive 18.5% to $1.2 billion, or $0.83 per share. The rebuilding efforts following Hurricane Sandy have caused a sales injection of $145 million. The results were significantly above the market’s expectations of $0.76 per share on revenue of $18.6 billion.

The better-than-expected results are largely due to the recovery in the housing market, which completely offset the negatives coming from unfavorable weather conditions and delays in tax refunds, which have hit almost every other retailer.

The Home Depot, Inc. (NYSE:HD)’s overall comparable-store sales increased by 4.3%, while the U.S. comparable-store sales increased by 4.8%. Customer transactions rose 2.5% and the average ticket price improved 5%.

In the previous quarter, the growth rate of The Home Depot, Inc. (NYSE:HD)’s professional-customer segment outperformed its consumer segment for the first time since 2008. This happened due to the resurgence of relatively smaller professional customers, i.e. those contractors who spend less than $10,000 a year. I believe that the increasing growth rate of this segment points toward improvements in the macroeconomic environment.

The Home Depot, Inc. (NYSE:HD) has now increased its annual earnings guidance from $3.37 a share to $3.52 a share and is also calling for a 2.8% increase in revenue as opposed to a 2% increase it announced earlier. But I don’t think that this is unusual as Home Depot has a habit of initially giving conservative guidance and then raising it later.

Interest rates

The record low interest rates are driving the housing boom, which translates into a healthy business environment for Home Depot and Lowe’s Companies, Inc. (NYSE:LOW). This was also evident in the quarterly results of Toll Brothers Inc (NYSE:TOL), the luxury home-builder, which has broken its seven-year order record.

Toll Brothers Inc (NYSE:TOL) announced its results on May 22. Its deliveries in terms of units increased by an impressive 33% and backlog climbed by 52% to 3,655 units. The company has beaten both top- and bottom-line estimates.

With demand increasing, prices are also going up and I expect this to continue in the coming quarters. The average price of signed contracts has increased by 15.9% to $678,000. Although its shares have struggled, the fundamentals of this niche player with few direct competitors are strong and I expect it to recover in the near term.

Lowe’s disappoints

On other hand, unlike Home Depot, Lowe’s sales were badly affected by cooler temperatures. Despite the “solid” performance of the indoor-merchandise unit, quarterly revenue still dropped by 0.5% to approximately $13.1 billion. Its net income rose by just 2.5% to $540 million or $0.49 per share, below analysts’ estimates of $0.51 per share on revenue of $13.4 billion.

Same-store sales also disappointed, posting a drop of 0.7% from the same quarter last year. This is in stark contrast to Home Depot’s results. I understand that Lowe’s is going through an overhaul; shutting down stores, changing the management structure, pushing toward “everyday low prices” and reviewing its product lines to better meet the customers’ needs. But the current results have shown that little improvements have been made so far and lots more needs to be done.

What makes Home Depot better?

Unlike Lowe’s, Home Depot’s management did an overhaul before the housing downturn, and as a result the company has been recording considerably better performance than its rival in the past few years. Most of its growth can be attributed to its transformational  changes – including improving its supply chain and investing in its workforce — and now, as the housing sector starts picking up, Home Depot is at the front row capitalizing on the improving environment. On the other hand, as indicated earlier, Lowe’s is making the necessary changes now and I believe that it will take some time before its effects become apparent.

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