In the ever-changing landscape of the retail industry, home improvement giants The Home Depot Inc. (HD, Financial) and Lowe's Companies Inc. (LOW, Financial) have been facing their fair share of challenges. These retail powerhouses have been competing for the attention and loyalty of do-it-yourself enthusiasts and professional contractors for decades. Both companies have recently been in the spotlight for various reasons, ranging from accusations of racial profiling to downgrades in stock ratings.
As investors and analysts closely monitor their earnings calls and financial results, it becomes clear that these industry leaders are navigating through a volatile market.
Home Depot has been preparing for its second-quarter earnings release, which is scheduled for Aug. 15. The company's stock has seen a slight increase in anticipation of the earnings report, with shares trading at $331.07. However, analysts have expressed concerns about soft consumer spending trends, lumber deflation and the need for continued investments to capture market share. Despite these challenges, the home improvement retailer remains optimistic about its growth opportunities and the potential to expand its total addressable market.
On the other hand, Lowe's, Home Depot's main competitor, has also been facing headwinds in the market. The Telsey Advisory Group recently downgraded both companies' stocks, citing a weakened housing market due to falling home sales and mortgage increases. This downgrade comes ahead of the company's earnings release, adding to the uncertainty surrounding its performance. However, Lowe's CEO Marvin Ellison remains confident in its ability to grow market share, particularly among professional customers. A recent survey conducted in April revealed that 75% of Lowe's Pro customers reported healthy backlogs, indicating potential growth opportunities in this segment.
Lowe's may be closing the gap
Ellison highlighted the challenges Lowe's faced, including a 4.3% decline in comparable sales. This decline was primarily driven by lumber deflation, unfavorable weather and lower DIY discretionary sales. However, despite these headwinds, the company managed to achieve slightly positive comparable sales in its Pro segment, which builds on top of a remarkable 22% U.S. pro comparable in the first quarter of the previous year. This success can be attributed to its MVPs Pro Rewards program, expanded assortment of pro national brands and improved omnichannel capabilities.
Online sales growth
Lowe's also experienced growth in its online sales, with a 6% increase in comparable sales and a sales penetration of over 10%. Its investments in upgrading the pro digital experience and enhancing the DIY online experience have paid off, resulting in higher online conversions and attachment rates. Additionally, the company has been focused on driving productivity through its perpetual productivity improvement initiatives. This operational discipline and agility helped it offset the impact of lower sales and higher wage costs, leading to an expanded adjusted operating margin and a 5% increase in adjusted diluted earnings per share compared to the previous year.
Home Depot's public image challenges
In addition to market challenges, Home Depot has faced negative publicity it needs to address appropriately. The company was recently accused of racial profiling in a $1 million lawsuit filed by actor Tyrese Gibson, claimed that he and two other men experienced discriminatory mistreatment during a visit to the home improvement store in February. While Home Depot has not yet responded to the allegations, this incident highlights the importance of maintaining a positive public image in today's socially conscious environment.
Lowe's progress in market share
Home Depot has long been known for its dominance in the home improvement industry, boasting a larger market share and a strong brand presence. However, Lowe's has been making strides to close the gap.
During its earnings call, Executive Vice President Bill Boltz mentioned that it is hard to measure home improvement share specifically. However, he expressed confidence that Lowe's is gaining market share in key categories such as appliances and paint. This indicates that Lowe's is making progress in challenging Home Depot's dominance.
A focus on online and pro segments
Another aspect to consider is the companies' strategies and initiatives. Both Home Depot and Lowe's have been investing in their pro segments, recognizing the importance of catering to professional contractors. Lowe's MVPs Pro Rewards program and expanded assortment of pro national brands have contributed to its positive comparable sales in the segment. Home Depot, on the other hand, has a well-established reputation among professionals and has been focusing on enhancing its pro services and offerings.
In terms of online sales, both companies have experienced similar growth and have a strong online presence as well. The ability to provide a seamless omnichannel experience has become increasingly important in the retail industry, and both retailers have been investing in this area. As a DIY user of both apps, I find Home Depot’s app easier to use, but both seem to be achieving omnichannel integration, meaning their brick-and-mortar presence complements their online offerings.
Analysts' recommendations
Industry experts and analysts continue to closely monitor the performance of Home Depot and Lowe's.
Brian Mulberry, the client portfolio manager at Zacks Investment Management, and Main Street Research Chief Investment Officer James Demmert have recommended retail stocks, including Home Depot, as potential investment opportunities. They believe these companies, along with Walmart (WMT, Financial), LVMH (XPAR:MC, Financial) and Tractor Supply Company (TSCO, Financial), have the potential for growth amidst market volatility.
Conclusion
As the retail industry continues to evolve, Home Depot and Lowe's Companies must adapt to changing consumer trends, economic conditions and public perception. While challenges persist, both companies remain committed to capturing market share and delivering value to their shareholders. Investors and analysts eagerly await their upcoming earnings releases, hoping for positive results that will instill confidence in the future of these industry giants.
