Shares of Lowe’s Companies Inc. (LOW, Financial) and Home Depot Inc. (HD, Financial) have dropped sharply over the past several days as investors are concerned about Amazon’s (AMZN, Financial) push into the appliance market through a deal with Sears Holding (SHLD, Financial) denting sales at home improvement stores.
At the center of it all is Sears’ decision to partner with Amazon to sell its Kenmore appliances, which does raise some concerns regarding appliance manufacturers taking the online route instead of going through the traditional brick-and-mortar store channel.
I think this assumption is highly misplaced. Rather, it opens up a wonderful opportunity for investors to load up on Lowe's and Home Depot.
For starters, Amazon is not entering into the appliances market for the first time. It has been selling appliances through Amazon.com for a very long time. Sears does hold a decent portion of the appliance market, but not so much that it is going to drag all the other manufacturers down.
According to CNBC, Sears' share of the appliance market is roughly 20%, down from 40% in the early 2000s.
"More specifically, Kenmore represents 40-50% of Sears' appliance sales — hence roughly 10% of the overall appliance industry — and has also been losing market share at a similar rate," JPMorgan analyst Michael Rehaut said.
Second, Home Depot and Lowe’s have already built strong digital sales channels, and Home Depot has been growing its online sales at double-digit rates for the past several quarters. If appliances can be sold on Amazon's online platform, then manufacturers can sell on the two companies' online platforms as well.
In fiscal 2016, Home Depot’s online sales grew 19% compared to fiscal 2015, accounting for 5.9% of its total sales. Amazon will never be able to match the spread of products available at Home Depot and Lowe’s, and let's not forget the network of physical stores they already have.
More important than everything else is the high operating margins both companies have, which will allow them to offer better prices their products than any new e-commerce player in the market.
As the e-commerce bandwagon continues to crush the traditional retail segment, the home improvement market has remained immune to it. Sales have grown steadily over the past 10 years for Home Depot and Lowe’s simply because they sell products customers love to see, feel and touch before buying. Sure, their digital sales channels are growing too, but most consumers still prefer to walk into a store to buy certain products.
The market's concerns are extremely misplaced, and the sharp decline in the price of Home Depot and Lowe’s makes for an excellent buying opportunity.
Disclosure: I have no positions in the stock mentioned above and have no intention of initiating a position in the next 72 hours.
