Home Depot vs. Lowe's: Which is the Better Investment?

Here's a look at the Return on Equity [ROE] of Home Depot (HD) and Lowe's (LOW) over the last few years:
 

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Considering all the negativity surrounding Home Depot, this has to come as a surprise to most. However, looking at ROE alone does not tell the full story of how well a company is managed. If one company is too highly leveraged, then ROE can look good for a long period of time, before finally crashing down and leaving shareholders in the lurch (consider many U.S. Banks and certain homebuilders).

So let's break down the ROE equation to determine what component debt is playing in boosting ROE, and what component approximates returns on invested capital.

ROE = Net Income / Equity = (Net Income / Assets) * (Assets / Equity)

(Net Income / Assets) is simply Return On Assets, which should give us a decent estimate of what kind of returns management gets on every dollar it invests in the business (e.g. land, buildings, inventory etc.). Here's the Return on Assets [ROA] of both Lowe's and Home Depot:

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We see slightly better returns for Home Depot, which is consistent with what we saw when we analyzed the sales per square foot and profits per square foot of these two companies. Note that this measure is not a perfect one. It's possible that Home Depot has assets on its books that are understated as compared to Lowe's (e.g. land, which is stated at cost, even if it has appreciated in value).

The second half of the equation above will show us how leveraged these two companies are:

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We see that in the last couple of years, Home Depot has been further boosting its ROE by levering itself up. Is it too leveraged? The answer to this question is never clear. But one thing we do know is that recent quarters have not been kind to the housing market, and as a result, these two retailers have experienced declining business. Let's take a look at how well Home Depot has been able to cover its interest payments in recent quarters during these rough times:

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It would appear that throughout this downturn, it has had ample room to cover its fixed obligations, suggesting its debt load is at fairly safe levels.

Home Depot has been mired in negativity in the last few years. However, judging from these metrics, it would seem that the company has run the business well. Of course, there have been some bumps in the road. As we saw here, many of the shareholder returns HD has generated were used to buy back stock at terrible prices. Going forward, however, HD seems to be in a position to provide shareholders with decent returns.

Disclosure: The author has a position in both HD and LOW.

Comments

[Non union Dan:]

Home Depot is better than Lowes..........I only say this because Lowes has a much prettier & cleaner looking stores but prices its goods higher than HD. Good Price's mean a lot to me. The people at Lowes are not as smart knowledge wise about there products and where they are located in the store. They seem to avoid you when you ask simple questions and leave you hanging. The stores management over controls its workers to the point that they cannot handle customers. No one at Lowes is empowered to give answers unless a manager gets involved.

2008 Sep 22 07:07 AM

[Non union Dan:]

Lowes has to greatly improve whereas on the other hand Home Depot for the most part have very good people minus a few bad apples who are very knowledable, helpful, and very street savy about their store. They can tell you where everything is at a drop of the hat. I always look for the orange aprons people who are freindly. I say this because I shop at six different HD stores because of the stores are under different proto types structure and stock different products & inventory levels. They have a system where they can give you inventory info about whats actually at each of their store's in the area. Its saved me a lot of useless driving around and wasted gas. Try it you'll like it. Just call into the customer service dept with the sku of the item & its name of the item and they tell within reasonable qty's what at any store. If ya want just call the store and they will reserve it under your name a credit card number. Use the WWW.Homedepot.com" to find the store closest to you.............to call.

2008 Sep 22 07:26 AM

[Eric Stark:]

My experience is just the opposite. In fact, in pricing Lowe's is usually the same or less. (I've just completed another large backyard deck project, and Lowe's won on nearly every component.)
At least around here, the Lowe's help is superior and the store is more attractive. Home Depot does seem to have improved the annoying "out of stock" problem they suffered under Nardelli (when they cut inventory to improve margins.)
I have ongoing experience with the stores in Knoxville (where I live), Boston (where I own a rental condo) and a little less in Reading, PA, where my parents live and where I occasionally help out. HD has cleaned up some of its problems, but still suffers "angry employee syndrome", so far as I can see.
Disclosure: I have owned HD shares since the 1990's, but now do most of my shopping at Lowe's.

2008 Sep 22 08:44 AM

[Homer Depot:]

There is really no other big box store to compare with Home Deopt. They have by far the most informed associates and the best prices for the quality of their products. They also provide many varied install programs to help the consumer with their projects.

2008 Sep 22 10:01 AM

[Urbane Gori...:]

Not sure where everyone lives, but I live in Northern California. I have a Home Depot within blocks of my rental property, so I tend to go there first. We have about 6 Lowes and 7 Home Depots that I shop as i travel. Give me a Lowes any day. Same prices, cleaner stores, you can **actually** buy your whole project one stop as opposed to HD, you can find sales people unlike HD. No contest. If all the Home Depots out here went out of business, I'd be just as happy driving the extra few miles to go to Lowes. In fact, I normally do.

Having said that, there are disparities across the US for different stores. In the Midwest, you have a well-stocked Wallmart on every street corner. I 'd have a 2 hour round trip to go there. ....

Oh yeah.... And in Minnnesota, you have 'Menards'... Now there's a quality big-box home construction outlet. They have everything!

jegan ;-)

2008 Sep 22 01:44 PM

[Former Home...:]

Speaking as a former employee, I happen to know that The Home Depot knowingly condones the abuse of alcohol and drugs by their employees, so long as they "like" that employee, even if the store has a high number of injuries. They simply blame someone else informally, if anyone who causes an accident is caught under the influence. The best employees get degraded and humiliated, if they don't bow down to the will of drunks-in-charge -- until they quit -- which is why the company has a high rate of employee turnover.

I complained about the issue, which was investigated by the State Government, but the people at The Home Depot are so deeply corrupt, that they don't care how many lies they have to tell, or how much mail they have to steal, or how many people they have to accuse in order to protect their desire to get drunk or stoned and come to work -- and kick around the people that try to consider the interests of their familiy. It's a terrible place to work, and anyone who has worked there, knows that.

2008 Sep 23 04:15 PM

[salgod44:]

Would like to respond to the previous message from Former Home Depot Employee. I think your case may apply at the store you worked at, but I have found nothing like what you described at the Home Depot Store I have worked at for 11 years, nor have I heard of that type of extreme situation at stores near mine.
I think one has to be carefull that they don't assume that the things that go on or are tolerated at one store are also the same at other stores. Of course that's true of a lot of things in life.

2008 Sep 23 08:25 PM

[Shopper:]

I get paid to shop both of these companies. More than 60% of the time Home Depot has lower prices than Lowes. They also have Bid Room which discounts product whenever I have large volume orders. For example Lowes and Home Depot both had the same price for 1/2" sheetrock. When I ordered my 800 sheets through Home Depot's bid room the price was about 16% less than if I had purchased through the register. Another huge issue is when Lowes does beat Home Depot's pricing it is not the exact same product. For example Lowes sells 6'x8' fence panels for around $38 Home Depot's are around $70. What they don't tell you is the lumber used to make Lowe's is #2 grade vs Home Depot's #1 grade. Truthfully overall Home Depot sells better product than Lowes. Another great example, Home Depot sells Rigid power tools. Our company has completly changed to this brand because it offers a full lifetime warrentee including batteries for cordless tools. This has cut costs for us when it comes to repair and maintaining our tools. Price and service are important issues and honestly it doesn't matter which company you go to because they are both hit and miss. Most people preffer one over the other simply because the drive is not as far. How I handle customer service issues is build a relationship with a few people who work there. When you get to know them by name they will always take better care of you.

2008 Sep 24 11:55 AM

[fixer-upper:]

I buy fixer-uppers, finish em up and sell (sometimes rent in todays market). I have shopped both HD and lowes in the Atlanta area. I am always pressed for time when I shop (because my list is long and I have workers I pay by the hour). I find the instock condition of Lowes better and service component of HD better.

The four pillars of any retailer are in-stock, service, price and ease of shopping (navigability).

INSTOCK: Lowes is better hands-down. The employees at HD tell me that Lowes has better logistics set-up and they can get small quantities of knick-knack items quickly. HD lacks this infrastructure and it takes them several days to get back in stock. Also their on-hands are often wrong. So it takes a few days and a customer to ask for the item for HD to realize that their on-hands are wrong and they really cant find it!!

SERVICE: HD is marginally better. They seem to have a few more employees who care vs Lowes. Every store is different but I generally find employees who are more empowered to take care of me than Lowes. However when I complain about a rude employee to management, Lowes seems to react quicker. I am told HD stores have HR managers who protect the employees who dont care about customers instead of firing them.

PRICE: Overall HD is slightly better and they have just launched a price reduction campaign. The quality of the products is better at HD and they have more recognizable brands. The main competitor for both retailers from a price standpoint is Amazon.com. Their margins are lot lower and hence they charge the customers less then HD and Lowes. When you have a planned purchase, give Amazon a try (for tools and stuff).

CONVENIENCE: HD is more convenient for me from a location standpoint. Lowes is a lot more cleaner on the inside and I guess female friendly but I dont care for that. I am very satisfied with the cleanliness of HD stores I visit. I once stepped into an old HD in Duluth, GA and man it was old!!

I would say, HD is winning the battle slowly but surely.

2008 Sep 25 10:31 PM

[blacksoxs11:]

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2008 Sep 26 01:27 AM

[blacksoxs11:]

I worked for homebase for 11 years then wend to DEPOT where i spend 13 years. that said My money is on Depot I droppped depot taking a 25 percent pay cut because I was sick of the direction it was going. That is long time employees where shoen the door so they could hire some one for half the price. that made my life hell because these kids know nothing more than what the HOME DEPOT training computer tells them(and it is wrong more times than it is right) I moved on not because I was going to be canned but they are promoting people to managers that dont have a clue on how to run a company.
I want the comapany to make money I have 936 shares and want to sell someday but not today. And they will make there money just not as much because if u need a water heater you need a water heater?
so if its a guy making 10 or a guy making 25 it dosent matter who loads it i am still buying it.. At least thats there ideal. Agree or not with a smaller overhead there stock should rise. and with the economy slidding they will fire more and service will suffer but if you still need a water heater you will buy it.. The only thing that will Kill depot is if they ever grow some balls(employees that is) and get a UNION if that happens the stock will dive but I will give a 90 percent vut in value for that because then the stock will sore in 10-15 years........

2008 Sep 26 01:28 AM

[DepotManager:]

I have no idea where the former employee who was complaining about his/her store manager is coming from (likely works at Lowe's). We test for drugs and alcohol all the time, and people are fired for failing these tests. There is a 1-800 number that any Associate can call to report problems like this, why didn't you use it? The call goes to the SSC, not the District or Region.

Lowe's has a good store, but all they do is copy HD. They wait until we build something, then put their store across the street. HD has better people, better merchants, a better product, and Associates at the lowest level can deal with you on the price for volume purchases. Lowe's can't.

On the financial side HD has anywhere from $500 million to $1 billion in cash on hand at any time (we can survive this downturn and come out stronger). We pay cash for things that Lowe's has to borrow for (like new stores). We are pretty much done building new stores in the USA, but we are expanding like crazy internationally (where the real growth is). We will be number 1 in China for the long run (they are building American style subdivisions there like crazy over there). We are number 1 in Canada and Mexico. We will be number 1 in South America, Lowe's will never get there. I doubt we will bother with Europe (margins are too low because of regulation).

2008 Sep 26 08:53 PM

[first hand ...:]

I'm going to use this blog as a personal forum, so skip it if you want, but it is valid. I work @ depot, and have for four years. When I started, the tenured associates thought Nardeli was the devil, and we were all glad to see him go, even though he got to take a truckload of cash and stock with him. We are all hopeful that the housing market will stabilize, and that our customers and associates will weather this downturn. There are more dedicated, thoughtful and hard working associates @ the Depot than anywhere else I have worked. The issue isn't the associates as much as the belief that cutting payroll is a good method for controlling expenses. We are outnumbered and unable to dedicate time and attention to everyone who needs it. We want to, and it is difficult to see someone not seem satisfied with the service provided, but 3 or 4 others are waiting for help and @ the end of the day you go home and know you've done all you could. Here's where the problem continues, everyone @ store level knows we need more staff hours, and I suspect that knowledge goes higher, way higher, but it is a fact denied in pursuit of the bottom line. No one wants to tell their supervisor, manager, ect. "Sorry boss, we just dont have the staff hours to handle your immediate project." That is not an option in a "get it done" environment like ours. Honestly, we want to be challenged, but not overwhelmed and set up to fail. If employees take the best care of the customers, the customers are loyal and happy and repeat business, the business will flourish and be able to take care of the employees. A simple formula that was working well and should be revisited. I hope someone with position and clout enough to do something reads this and is motivated. I like my job, but it needs improvement and maybe you can help..

2008 Sep 28 09:52 AM

[haveittodayray:]

Have worked for both companies in a manager position for many, many years. They are almost identical in operation, except Lowe's spends far too much time and effort in Sarbanes Oxley 404 compliance, with the operation side of the business. Home Depot, spends more time and focus on sales. Lowes stores are cleaner, wider ailses and much more easier to shop. They are both good companies, in the final analysis, its the management and employees of each store that make the difference for the customer. Never forget that customer have a choice, and they "vote" everyday where they want to shop at. If you want a customer for a lifetime, then it is necessary to exceed their expectations when they walk through the front door, its really as simple as that. Treat a customer like a guest in your home, roll out the red carpet for them, and they will be a loyal shopper for years to come. In most stores today, your an interruption, they are far too busy, doing tasks, ie, task oriented, rather then customer service oriented. The stores that realize this, will be the growth ones.

2008 Oct 05 06:38 PM

[Lilbrotha:]

AMEN!!! Brother like you I have also worked both companies and find no major differences as to how they are operated. In fact about 30% of the "corperate bigshots" are formerly from HD that is why we are slowly mirroring them in operation standards. I was proud to wear orange and am just as proud to wear red. Personally I have shopped both stores and it's a hit and miss how I was treated on a certian day. I'll give some of you out there a hint. Shouting out at the employee helping you or the Manager trying to assist "I'LL take my business to (Lowes/Hd) will win you an attitude everytime you enter that store again. So buyer beware if you burn that bridge at both competitors you might as well suck it up and shop a lumberyard for your next project, And don't mention Lowes or Hd.

2008 Oct 31 10:45 PM

[DEPOT DUDE:]

Thats just cause your a retard you apparently have never worked in a big store ,you were probably handed everything, I work there and when people like you come in to our store your hateful to the associates and cashiers we are there to do a job, so instead of bashing us how about bashing the corparate office they control ordering they control how many sales associates are on the floor, I have a family just like you and would much rather have my day go smooth but it nevers does cause of assholes like you!!!


On Sep 22 01:44 PM Urbane Gorilla! wrote:

> Not sure where everyone lives, but I live in Northern California.
> I have a Home Depot within blocks of my rental property, so I tend
> to go there first. We have about 6 Lowes and 7 Home Depots that I
> shop as i travel. Give me a Lowes any day. Same prices, cleaner stores,
> you can **actually** buy your whole project one stop as opposed to
> HD, you can find sales people unlike HD. No contest. If all the Home
> Depots out here went out of business, I'd be just as happy driving
> the extra few miles to go to Lowes. In fact, I normally do.
>
> Having said that, there are disparities across the US for different
> stores. In the Midwest, you have a well-stocked Wallmart on every
> street corner. I 'd have a 2 hour round trip to go there. .... <br/>
>
> Oh yeah.... And in Minnnesota, you have 'Menards'... Now there's
> a quality big-box home construction outlet. They have everything!
>
>
> jegan ;-)

May 15 12:31 PM

[mickey10:]

I work at Home Depot in Stapleton (Denver). As for customer service and knowledge-yes we are pretty good with that. But the tactics for improvement are basically by the use of fear and control. You must walk on egg shells for fear that someone is watching you all of the time. And boy watch out if a manager gets it in for you. Survival depends on keeping your mouth shut about anything that could be improved, to have opinions or question anything-especially if you are female.

Jul 18 09:26 AM