Lowe's: Building On a Solid Foundation

Includes: HD, LOW
by: William Trent, CFA

One of the first things many investors do when looking at a company is compare it to its peers. Many of the same trends will affect all of the companies in an industry, helping investors determine the winners and losers. Consider, for example, the 2-year performance of Home Depot (NYSE:HD) and Lowe's (NYSE:LOW).

hd low

The two certainly trade like birds of a feather. Given that the housing market peaked about two years ago, perhaps it shouldn't be surprising that two stocks closely tied to housing have drifted down. It's hard to blame a company for doing poorly in a poor environment, so one might be sympathetic when listening to Home Depot explain its quarter.

Our market continues to be a challenging one. You are familiar with the statistics: housing starts are down 22%, existing home sales are down 12%, inventory of homes for sale is at 8.7 months -- a 15-year high -- and the home builder index is at 24%, a 16-year low. In addition, the issues around the subprime market continue to intensify and this is an important concern both for the financial markets generally and for housing specifically, since subprime mortgages accounted for 24% of the dollar volume in the mortgage market last year. So this is a difficult time and our performance reflects that.

Sales were $22.2 billion, down about 2% for the quarter. Comp sales were a negative 5.2%.

(Excerpt from full HD conference call transcript)

Not so fast, says Lowe's.

The sales environment remains challenging as home improvement consumers hesitate to take on longer discretionary projects, but the core of our business remains relatively strong as our employees continue to help consumers maintain their largest financial asset. Total sales increased 5.8% while comp store sales declined 2.6% during the quarter.

(Excerpt from full LOW conference call transcript)

Ouch. Not to worry though - Home Depot management say they are taking care of that share loss.

We have reversed our market share loss; or in other words, we're not losing market share as fast as we were.

(Excerpt from full HD conference call transcript)

Actually, I hate to break it to them but "reversing" share loss would be gaining share - not losing it at a slower pace. When management starts measuring its performance on the basis of "it could be worse," it doesn't exactly warm investor's hearts. More encouraging words are heard from Lowe's.

We can't control the macro environment, but we are focused on executing and delivering great service in our stores to capture share....

In short, the message I want to ensure is conveyed today is that we're always working to improve every facet of our business. In good times and in slower times, we're focused on making our company stronger to become the store of choice for home improvement purchases. It's those efforts to constantly improve our service to customers that helps drive market share gains and position the company for continued long-term success.

(Excerpt from full LOW conference call transcript)

It is always good to have a strong foundation. But it becomes even more important when things are tough. Given the apparent differences in strength between the two companies, it gets hard to understand how they have been trading in tandem.