The housing recovery currently provides the catalyst for the share price gains of home improvement retailers, The Home Depot, Inc. (NYSE:HD), Lowe’s Companies, Inc. (NYSE:LOW), and Lumber Liquidators Holdings Inc (NYSE:LL). However, a company with good fundamentals will provide superior returns in good times and bad. Weighing the fundamentals from the perspective of pros and cons can help you decide if these companies can do just that.
Home Depot pros
Cash – Home Depot also possesses the most cash at $2.5 billion exceeding Lowe’s Companies, Inc. (NYSE:LOW) $666 million and Lumber Liquidators’ $64 million. Home Depot increased free cash flow 4% in 2012.
Merchandise – Home Depot’s merchandise performing “above average” consisted of “tools, lumber, electrical, outdoor garden, lighting, indoor garden, and décor” according to its latest earnings call. It looks like The Home Depot, Inc. (NYSE:HD) became the go to place for redecorating your lawn and remodeling your house.
Fundamentals – The Home Depot, Inc. (NYSE:HD) improved sales and net income 6% and 17% respectively. Operating and gross margins each increased 10% driven by supply chain efficiencies and a stark reduction in shrink or the level of theft.
Home Depot cons
Stock buybacks – Home Depot plans to utilize $4.5 billion in “excess cash” for share repurchases. In addition, due to the attractiveness of low interest rates, Home Depot plans to take on debt in order to do so. Home Depot’s long term debt to equity ratio of 53% already exceeds my personal preference of 50%.
Customer service – Lowe’s Companies, Inc. (NYSE:LOW) found a deeper appreciation for customer service in 2012. Its management team discovered that an increase in store labor hours devoted to customer service on the weekend translated into more customers walking out the door with purchased merchandise or “conversions” in store speak. In the last earnings call (sign in required), Lowe’s management gave indication of adding part-time labor hours devoted to customer service throughout the middle of the week.
Inventory – Lowe’s management decided to give a razor sharp focus on inventory management in an effort to further enhance sales during the housing recovery. Lowe’s hired a new merchandising executive with experience in home improvement products at Husqvarna and General Electric, Mike Jones, to spearhead the effort.