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.
This is the company’s most important initiative for 2013, and by the end of the first quarter the inventory resets had taken place for around 50% of its business. The remainder will happen throughout the year. However, the benefits will flow in once the sales of reset items have stabilized. At the end of the first quarter, Lowe’s has stabilized approximately 30% of the merchandise.
This initiative may turn out to be an important comps booster over the coming quarters. It is true that like all transitions, the company is having some teething issues to make this operational. Once a product line is stabilized, however, management expects to see average mid-single digit comps and roughly 100 basis points of margin improvement rate for the same.
More customer orientation
Lowe’s Companies, Inc. (NYSE:LOW) has recruited more staff for customer-facing roles. This means that it will have more staff on its shop floor during peak weekday hours to assist the customers and provide better services. The company is planning this out to ensure that there is an adequate focus on areas and products that offer more opportunities.
Lowe’s is implementing this initiative in a phased manner. It has started with the southern markets that saw better weather conditions and is heading northward. The company is ensuring that the new staff is rigorously trained to achieve the maximum results.
The plan sounds good, and if Lowe’s can make this happen then this should definitely improve the company’s sales-close rate and boost comps.
Home building trends
The success of Lowe’s Companies, Inc. (NYSE:LOW) over the coming months will be driven by the activity of the home-building segment. The good news is that confidence among builders is increasing as low mortgage rates attract buyers.
Recently-released data shows that the National Association of Home Builders/Wells Fargo index of builder confidence increased to 44 in May from 41 last month. While the overall sentiment is still negative, it is inching towards the 50-mark that switches the reading from negative to positive. The index has not crossed 50 since April 2006.
Most home builders, including PulteGroup, Inc. (NYSE:PHM), Lennar Corporation (NYSE:LEN), Beazer Homes USA, Inc. (NYSE:BZH), Toll Brothers Inc (NYSE:TOL), and others, are witnessing higher demand.
Toll has said that its new orders have increased by 36% to 1,753 homes in the second quarter. This increase is valued at around $1.19 billion. The company delivered 894 units during the quarter, a delivery rate that is 33% higher than a year ago. The average price of homes delivered was $577,000, compared to $557,000 last year.
During the second quarter, Toll Brothers Inc (NYSE:TOL) reported adjusted earnings of $0.09 per share which were ahead of analysts’ estimates of $0.07 per share. Revenue increased by a whopping 38% to $516 million. In comparison, analysts’ at Thomson Reuters I/B/E/S had predicted revenue of $512.4 million for the company.
Last word
Given the home-building trends and the operational initiatives that Lowe’s has taken, it looks like things are going to get better for the company. It will also benefit from some of the delayed spring sales. Investors can expect good news from Lowe’s over the coming quarters.
The stock is cheaper than The Home Depot, Inc. (NYSE:HD)’s, trading at 16.64 times its forward earnings in comparison to Home Depot’s forward price-to-earnings multiple of 18.55. It also offers a good entry point for investors hoping to leverage the housing play.
Eshna De has no position in any stocks mentioned. The Motley Fool recommends Home Depot and Lowe’s. Eshna is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Are You Disappointed with this Retailer? originally appeared on Fool.com and is written by Eshna De.
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