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Home Depot is a better-run chain than Lowe's: Oppenheimer Nagel

Susannah Lee

The housing market has been one of the bright spots in the economic recovery. Home improvement retailers are expected to continue to benefit from this bullish trend as Home Depot (HD) and Lowe’s (LOW) get set to post third-quarter reports.

“I think from a sales perspective that's exactly what you'll see when that when both companies report,” said Brian Nagel, senior analyst at Oppenheimer.

But the two home improvement retailers are not standing on the same foundation, he said. “I'm concerned with Lowe’s, as I've dug through their guidance … I think they're overly optimistic with respect to expense leverage,” said Nagel.

Warmer weather in the Northeast was one of the factors department stores blamed when they posted disastrous Q3 results. The same excuse could also come up for these home improvement retailers. “I look back to a Tractor Supply (TSCO), which reported results a few weeks ago. Similar type of demand dynamic as Home Depot and Lowe's, and there was a weather impact there,” warned the analyst.

Even so, seasonal weather factors aren’t as significant for these retailers compared to clothing chains or department stores. “Big key difference…[is] there's not much inventory risk,” said Nagel. “If products are not selling well at Home Depot, they can just pack it away and sell at some point. They’re not going to have to market down,” he added.

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Oppenheimer has an “outperform” rating for both Home Depot and Lowe’s, but the firm clearly favors one home improvement center over the other. “Both companies are benefiting from the housing market. Home Depot's is the better-run chain at this point,” said Nagel.

Home Depot is set to post third-quarter results before the bell on Tuesday. The Street is expecting earnings per share of $1.32. Rival Lowe’s follows on Wednesday with its third-quarter results, with estimates of $0.78 per share.

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