Home Depot, Inc. (HD), Lowe’s Companies, Inc. (LOW): Crashing The Home Improvement Party

The U.S. home improvement retailing duopoly of The Home Depot, Inc. (NYSE:HD) and Lowe’s Companies, Inc. (NYSE:LOW) have been content to carve up their industry among themselves, leaving few scraps for their competitors. They have used their size and national scale to put mom-and-pop retailers out of business, with a seemingly limitless inventory of products in their warehouse-style stores, which average more than 100,000 square feet. However, customer service hasn’t always been their forte. So, it is nice to see a smaller competitor, Lumber Liquidators Holdings Inc (NYSE:LL), crashing the party and taking market share in the flooring category. With a big stock price gain over the past 12 months, can Lumber Liquidators continue to deliver for investors?

Founded in 1994 to sell surplus quantities of wood products, Lumber Liquidators has grown into the largest specialty retailer of hardwood flooring in the U.S. The company operates almost 300 stores throughout the U.S. and Canada, offering a diverse inventory of wood floor coverings, including its premium Bellawood brand that comes with a transferable, 100-year warranty. In contrast to its larger competitors’ warehouse-style stores, Lumber Liquidators Holdings Inc (NYSE:LL)’ stores average roughly 7,000 square feet, which allows their employees to take a more personalized approach with customers.

In FY2012, Lumber Liquidators achieved a breakthrough year, with increases in revenues and operating income of 19.3% and 84.6%, respectively, versus the prior year. The company’s sales growth benefited from a solid rebound in the domestic housing market, as higher prices gave homeowners more confidence to spend money on value-enhancing renovation projects, including new floor coverings. In addition, rising customer demand led to a favorable pricing environment as more buyers opted for premium hardwood styles.

In the first quarter of 2013, Lumber Liquidators Holdings Inc (NYSE:LL) successfully built on last year’s results, with a 22.5% increase in revenues. The gains were generated from both a very strong 15% rise in comparable store sales and the further build-out of the company’s national store expansion strategy. More importantly, Lumber Liquidators’ operating margin hit a record high during the period, as its larger scale translate into higher profit margins. The resulting operating cash flow is allowing the company to further invest in its capabilities, including an iPad application that allows customers to search through a catalog of 200 floor samples.

Naturally, the home improvement giants aren’t standing still in the fight for customers’ home improvement purchases. The Home Depot, Inc. (NYSE:HD), in particular, has recognized its customer service deficiencies and has initiated its Customers First program to enhance its employees’ communication skills. The company’s goal is for 60% of each store’s total employees’ work hours to be spent on customer-facing activities. In addition, The Home Depot, Inc. (NYSE:HD) is pursuing tuck-in acquisition opportunities in the flooring area, including the 2012 purchase of MeasureComp, a floor measurement and quoting service provider.