Here’s Why Home Depot Continues To Win

Recently, America’s retail heavyweights, Home Depot (NYSE:HD) and Lowe’s (NYSE:LOW) reported their fiscal first quarter results. Although an upbeat U.S. economy and housing markets has supported phenomenal results for both names the past few years, macroeconomic fundamentals were hardly cooperative in the quarter, with the U.S. economy growing just 0.2% instead of the predicted 2.3%. ((Economic Growth Slows Sharply In Q1 2015: 5 Factors Slowing US GDP)) The slow down in the U.S. economy at large also exerted an impact on housing markets in the early part of the quarter, with existing home sales falling 4.9% in January to a seasonally adjusted average rate (SAAR) of 4.82 million, the lowest since May 2014. While Lowe’s under-performed analyst expectations with $14.1 billion in revenues, Home Depot reported strong results at $20.90 billion in revenues to beat analyst expectations. Here are some reasons why Home Depot continues to champion the duopolistic U.S. home improvement industry.

Geographical Advantage and Skewed Housing Market Improvement 

First and foremost, Home Depot has a wider geographical footprint in comparison to Lowe’s. As of 2014, Home Depot has over 2,200 stores, while Lowe’s has a little over 1,800 stores. Along with a broader reach, Home Depot benefits from having more stores in states like Florida and California, that along with having milder winter weather, have been reaping greater benefits of the housing market recovery. For instance, Florida experienced a 18.6% increase year-on-year in home sales, along with an 8.3% increase in the median sale price in the first quarter. ^[1] Similarly, California’s housing markets also experienced a boom, with home sales reaching record highs in March. ^[2] While Home Depot has close to 232 stores in California and around 152 in Florida, Lowe’s has about 25 in each of these states. Given this, Home Depot is better positioned to take advantage of the upbeat housing markets that these states have been experiencing.

A Booming Online Business

Apart from a mere geographical advantage, Home Depot continues to outperform Lowe’s in the lucrative online segment, by integrating its vast network to drive ease in transaction and to improve efficiency for customers. While Lowe’s has worked to improve its delivery schedule, expanded it’s online offerings, and improved content for its “17,000 highly visible items,” its prospects in the realm continues to be threatened by Home Depot. ^[3] In 2013, the retailer declared the launch of “Home Depot Delivers” in select stores to allow same-day shipping for all online orders. ^[4] In this respect, they opened two distribution fulfillment centers last year, with each center holding more than 100,000 stock keeping units, approximately 70,000 more than the average store. Through a network of over 2,000 stores, Home Depot continued to ship goods straight from the inventory to customers, which drastically improved customers’ shopping experience by reducing the time lag between ordering a product and its delivery. ^[5] Against this, the retailer saw a 30% increase in online sales in the first quarter, as opposed to 25% for Lowe’s. With the addition of a third fulfillment center later this year, Home Depot will be able to to deliver approximately 90% of all online orders in less than two days time, which could set them gaining further in this sphere.

Winning With the Pros

Complementing the budding online business, is a higher focus on Pro customers, who are instrumental in driving ticket sizes. Both Home Depot and Lowe’s have done a great deal to increase appeal among pro customers by broadening their portfolio in high Pro-penetration categories, such as lumber and building material, mill work, rough plumbing and electrical, and tools and hardware. In the quarter, Home Depot continued to leverage technology to hone productivity and save time for pro customers. For instance, the retailer introduced a new product line of DEWALT and Makita pneumatic nailers, which apart from being more compact, incorporated a “True Sight nose technology” that increased speed and efficiency in nail placement. ((The Home Depot (HD) Craig A. Menear on Q1 2015 Results – Earnings Call Transcript)) Acknowledging Pros’ increasing preference for cordless offerings, Home Depot also added battery operated equipment to its portfolio. A strong brand portfolio, coupled with speedy delivery, has resulted in close to 35% of Home Depot’s revenues coming from Pro customers, as opposed to 25% for Lowe’s.

Home Depot has had a reputation for being the king of productivity since the reign of former Chairman, Frank Blake. Furthermore, the infamous data breach last year has had little impact in terms of lost business for the retailer. In this case, we expect Home Depot to continue benefiting from the U.S. housing market recovery to set the company touching new heights going forward.

We have a price estimate of $120 for Home Depot’s stock, which is above the current market price.

Our complete analysis for Home Depot’s stock

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1. Quarterly Market Summary – Q1 2015 [↩]
2. Here’s proof California’s housing market is now booming [↩]
3. Lowe’s Companies’ (LOW) CEO Robert Niblock on Q4 2015 Results – Earnings Call Transcript [↩]
4. Home Depot tests delivery-from-store expansion [↩]
5. Home Depot Launches “Home Depot Delivers” To Fulfil Same-Day Shipping [↩]