It is a natural reaction. When two close rivals publish their report cards within a day of each other and the results are dramatically different, there is a lot of speculation over who did what. In this case, I am talking about the country’s two largest home improvement retailers: The Home Depot, Inc. (NYSE:HD) and its smaller peer Lowe’s Companies, Inc. (NYSE:LOW).
Both companies have recently reported their first quarter results. The wide gap between the two has earned praise for the former and negative sentiments for the latter. Taking nothing away from Home Depot, I think that Lowe’s can also satisfy its investors as the housing recovery gathers steam.
The comparatives
The Home Depot, Inc. (NYSE:HD) was the first to report and put on a spectacular show, beating both revenue and earnings estimates. The company reported an 18% increase in net income to $1.23 billion or $0.83 per share on a 7.4% increase in revenue, which came in at $19.1 billion. Consensus estimates of analysts at Thomson Reuters were for earnings of $0.77 per share on revenue of $18.68 billion. The company reported same-store sales growth of 4.3%, with its US stores witnessing even higher comps growth of 4.8%.
Lowe’s Companies, Inc. (NYSE:LOW), which reported a day after The Home Depot, Inc. (NYSE:HD), showed a muted performance. Although the company’s earnings improved from $527 million, or $0.43 per share a year ago to about $540 million, or $0.49 per share in the current quarter, net sales were off by 0.5% at $13.09 billion. Analysts polled by Thomson Reuters were expecting $0.51 per share on revenue of $13.45 billion. There was an unexpected 0.7% decline in same-store sales.
Lowe’s Companies, Inc. (NYSE:LOW)’s results were marred by the cold, wet weather. The Home Depot, Inc. (NYSE:HD) also suffered, but it was better off due to its higher exposure in California and Florida where the weather was better. It derives approximately 10% of its sales from California, compared to 6% by Lowe’s. Home Depot also has more presence in Connecticut, New York, and New Jersey and was better able to benefit from the rehabilitation post the Hurricane Sandy devastation.
The Home Depot, Inc. (NYSE:HD)’s success is not just about the weather and geographic mix alone, however. The company has done a fantastic job of boosting its Internet sales through new strategies, cutting costs, and offering competitive prices.
So where does that leave Lowe’s?
The management at Lowe’s Companies, Inc. (NYSE:LOW) is aware of the key areas where the company needs to concentrate its efforts and is implementing some smart strategies to usher in long-term growth. These new strategies would enable the company to play a larger part the housing recovery and improve its overall performance.
Focusing on professional segment
Benefits from the housing recovery can be reaped only through a good presence in the professional segment comprised of contractors, professional re-modelers, and small builders. This segment comprises approximately a quarter of Lowe’s total sales. In the first quarter, this segment grew faster than the DIY segment, and this is a trend that we will see continue for the next few quarters if the housing demand remains positive. As a result, the company is trying to increase its exposure here.
Lowe’s Companies, Inc. (NYSE:LOW) has introduced a “Contractor Packs” program through which its professional customers can buy bundles of their most-used items at discounted prices. It also offers bulk discounting on other items available in the store. This is in addition to last year’s “value pro”’ initiative whereby it started offering a flat 5% discount on all purchases made through the company’s proprietary credit vehicles.
Lowe’s is also getting its outdoor sales team to build up a more concrete relationship with its customers to achieve a greater penetration in this segment. These efforts should see the company’s professional sales expand over the coming quarters and drive faster growth.
Value improvement initiative
Lowe’s Companies, Inc. (NYSE:LOW) has undertaken a value improvement initiative whereby it is trying to realign its merchandise according to the demand and preference of its customers. As part of this initiative, the company is increasing the depth of its inventory to ensure that its stores have adequate supplies of fast-moving items. Simultaneously, it is simplifying its deal structures so it can provide everyday low prices.
