The Home Depot, Inc. (HD), Lowe’s Companies, Inc. (LOW): Betting on Home-Improvement Companies

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While projected U.S. GDP growth has not changed materially, macro-housing data continues to improve. Private fixed-residential investment as a percentage of GDP has been growing for the past six consecutive quarters and it is now at 2.7%. Increasing household formation, price appreciation and higher housing turnover are all positive signs for home-improvement retailers, which are profiting from the better sales after years of pessimism.

However, credit availability remains tight and constrains the velocity of the recovery. In addition, considering how highly fragmented the industry is, companies will have to focus primarily on customer service, price, store location and assortment of merchandise.

Let’s analyze how three companies in the sector are doing.

Good performance and great outlook

The Home Depot, Inc. (NYSE:HD)

The Home Depot, Inc. (NYSE:HD) is the world’s largest home-improvement specialty retailer. It operates 2,257 stores and employs more than 300,000 people.

The company reported sales of $19.1 billion for the first quarter, a 7.4% increase from the prior-year’s quarter. Seasonal time changes were beneficial, adding $574 million to sales. Net earnings were $1.2 million compared to $1 million a year ago. Due to this out-performance, management is revising upwards both sales and earnings guidance for the year.

The Home Depot, Inc. (NYSE:HD) is focusing on developing merchandising tools and increasing its investment in e-commerce. As part of its interconnected retail strategy, the company has completed the roll-out of its “buy online ship to store” initiative, giving customers access to more than 300,000 items available for pickup at the stores. The response from customers has exceeded management’s expectations; some 20% of customers who pick up an order at the store also buy additional items.

In addition, the company has been introducing significant changes to make its store operations simpler and more customer friendly. I believe these initiatives will drive more traffic and increase sales.

The Home Depot, Inc. (NYSE:HD) has a disciplined capital allocation strategy as well, as it utilizes excess cash to enhance shareholder returns via share buybacks and dividends paid. Through the company’s share-repurchase program, 27.2 million shares have been repurchased this quarter, totaling $2.1 billion.

Moderate quarter and large share repurchases for Lowe’s Companies, Inc. (NYSE:LOW)

Lowe’s Companies, Inc. (NYSE:LOW) is a the second-largest home-improvement retailer. It operates 1,755 stores in the U.S., Canada and Mexico.

The company’s first quarter was modest. Net earnings reached $540 million, growing 2.5% year-over-year. Overall performance in March was soft and improved in April and May. Indoor categories performed solidly while outdoor categories were negatively impacted by weather conditions, especially unseasonably cooler temperatures and greater-than-normal precipitation. However, management is optimistic and expects total sales to increase approximately 4% this fiscal year.

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