Both companies have been riding the improving housing market as evidenced by their strong earnings results. The housing backdrop remains an important tailwind for both names, with the latest piece of strong data coming from the Case-Shiller index reading Tuesday that showed property values up 5.7% from a year ago.
The two home-improvement companies have the same businesses across the U.S., but Home Depot is clearly the outperformer -- a fact that’s reflected in their respective stock prices. Home Depot is up 7% over the last year amid a difficult market, while Lowe’s is down 10%. In the last 5 years, shares of Home Depot have far outpaced Lowe’s, up 232% vs. 153%.
Comparable-store sales tell a similar story. While Lowe’s comp-store sales -- up 5.2% -- were solid, Home Depot clocked a 7.1% jump in comparable-store sales last quarter.
Since the recession, Home Depot has out-comped Lowe’s in almost every quarter. See the below chart from Stifel:
So how is it that Home Depot has been able to outperform Lowe’s?
Restructuring program advantage
Frank Blake, the former Home Depot CEO, began a major restructuring program just before the 2008 downturn. Plans were already underway to cut costs, close underperforming stores, increase productivity, improve the supply chain, and make new efforts on localized merchandising. Lowe’s, on the other hand, rolled out a restructuring plan in 2011, but the benefits lagged. So Home Depot had a leg up on its competitor and the company’s current CEO, Craig Manear, has been able to leverage that.
Catering to the pro
The professional customer--primarily professional remodelers, general contractors and small business owners--has been an important sales driver for both companies, as they tend to spend more, take more trips, and conduct bigger projects. And Home Depot has more exposure to the pro customer (around 40% vs. 30% for Lowe’s). Big-ticket items, often driven by the professional customer, continue to dominate sales growth -- including categories like appliances, roofing, and special-order kitchens (along with services for installation services). At Home Depot, comparable store sales for purchases of $900 and above were up 11.9% last quarter.
Home Depot has driven share in the professional category by offering more exclusive products, more credit options, and precise delivery alternatives.
And last summer Home Depot announced a $1.6 billion acquisition of Interline Brands to expand its Pro division, which caters to professional contractors and builders.
While the nature of the product category protects it to some degree online compared to apparel retailers (when people need a new roof, they usually need it now; they don’t typically need a new handbag now), Home Depot has been especially proactive when it comes to building out its online business. E-commerce sales there grew by 25% in 2015 to $4.7 billion and now account for 5.3% of total revenue, up from 4.5% in 2014.
Lowe’s online business, while also growing rapidly (up 25% in the fourth quarter), represents just 3% of sales. The company just relaunched its “Lowe’s for Pros” online service last year.
Location, location, location
Home Depot’s stores are better situated relative to big population centers in most markets, and people tend to shop at the store that’s most convenient. Lowe’s has been making an effort to catch up, especially with new-store openings, but it has taken time and money. (Atlanta-based Home Depot is a bit bigger with 2,274 stores, compared with 1,855 for Lowe’s.)
The bottom line: While Home Depot and Lowe’s are both more shielded from Amazon’s (AMZN) wrath than apparel retailers and mass merchants like Walmart (WMT), Home Depot continues to outshine its competitor.