Contrary to what some readers believed, I didn't think that was a huge demand. After all, "improving" is in the company's slogan. But here's the thing: Even though I wasn't particularly enamored with Lowe's recent performances, I still believed that Lowe's stock, which did not fully reflect the company's long-term potential, was a strong buy.
By contrast, I felt that shares of Home Depot had reached their peak. This is even though no one could disagree that Home Depot had meaningfully outperformed Lowe's on an operational basis.
The market had fallen in love with Home Depot, while overstating much of Lowe's weaknesses, many of which clearly just near-term struggles. In the span of two months, though, shares of Lowe's have been up by more than 12%, while Home Depot has traded flat.
And after a solid quarter, during which management raised guidance, investors should expect more of the same stock outperformance.
Now, this is not a situation where I'm going to try to make Lowe's appear like the better company in this duopoly. I believe more improvements need to be made before that happens.
Still, after coming off a May quarter, during which management blamed (among other things) the weather for the company's disappointing results, Lowe's was able to grow revenue this quarter by 10% while also raising guidance. That's a strong statement.
I'm not going to blow one quarter out of proportion. But the first takeaway was that Lowe's outgrew Home Depot this quarter. It also says that the steps that management has taken to improve operational efficiency are beginning to pay dividends.
And as evidenced by the 9.6% growth in same-store sales (or comps), which tracks the performances of stores that have been opened at least one year, there's no denying that Lowe's has found a solution to its merchandising and cost-management deficits.
Although I had little doubt that Lowe's would eventually get its house in order, weak merchandising and a feeble cost structure had eroded Lowe's foundation, which led customers to Home Depot instead.
That the company has now produced its best comp growth in a decade, I have to credit management It's been an extremely difficult environment, especially given the weak comps that we've seen from the likes of Wal-Mart
Although it may sound like it, I'm not here boasting about my confidence in Lowe's. Well, maybe a little. But it's not hard to like a company that has put together the string of profitability that this company has. Even though Lowe's had struggled with growth and some operational deficits, the company had never showed signs that its cash registers were not ringing.
And that gross margins advanced this quarter by 42 basis points also suggests exceptional cost controls, which is not easy to achieve, by the way. So even though the company added to its workforce, while also extending employee work hours, management still figured out ways to boost operating income by 25%, demonstrating strong signs of efficiency.
Unlike some recent quarters, there were no noticeable weaknesses this time in Lowe's that Home Depot could exploit.
To be fair, given Home Depot's likewise solid results, I don't believe that this is a situation where Lowe's is stealing market share from Home Depot. Given what I've seen from lumber manufactures such as Weyerhaeuser
The question, though, is how long can this continue?
The good news is that Lowe's is no longer suffering from self-inflicted wounds. It seems as though Michael Jones, who the company added earlier this year as chief merchandising officer, already deserves a raise.
For now, however, it is investors who have benefited from the company's hard work and solid improvements. These shares should end the year at $50. And until that mark is reached, I believe that this stock should be in your portfolio.
At the time of publication, the author held no position in any of the stocks mentioned.
This article was written by an independent contributor, separate from TheStreet's regular news coverage.
- 10 Cars From 2013 You Should Buy Now
- Looking for an Investment? 9 Franchises for About $100K
- 5 Biggest Auto Flops of the Past Decade
- Investment & Company Information
- Home Depot