Lowe’s and Home Depot Crushed Earnings: Can They Keep It Up Long-Term?

The home improvement industry benefited over the past few months while people stayed home and spent their stimulus checks on home improvement projects. According to the U.S. Department of Labor, categories like home furnishings and gardening saw gains starting in May. Two of the winners here were Lowe’s (NYSE:LOW) and Home Depot (NYSE:HD), rival home improvement chains that dot the American landscape.

Both of these companies have put tremendous amounts of resources into restructuring and becoming agile businesses that are in line with current digital trends. Both companies saw surging demand in the first half of 2020, and they delivered (physically and figuratively). But will these trends remain long term? And how will they affect the companies’ stocks?

Ready for this moment

As difficult as the pandemic has been for so many businesses and individuals, technology has eased the pain. Customers don’t have to leave their homes when Amazon‘s Prime packages arrive at their doorsteps, and most large U.S. businesses were prepared for the switch to online retail with a full digital smorgasbord. 

Home Depot employee carrying paint buckets.

Image source: Home Depot.

Competition has heated up between the perennial leader in home improvement, Home Depot, and the No. 2 Lowe’s. Both of these companies have invested in their digital platforms and made other changes to their operations that positioned them for growth during the pandemic.

Keeping up its lead

Home Depot initiated its “One Home Depot” strategy in 2017 to create interconnected offerings and meet customer demand in the digital age. That paid off over the past few months as Home Depot earnings jumped almost 25% in the second quarter ended Aug. 2, a period that included lockdowns across the U.S. Digital sales increased approximately 100% with customers picking up 60% of those orders in store. The home improvement project trend was obviously a sales driver as well, and the 23% revenue growth was well above the company’s more typical single-digit quarterly increases.

The fiscal second quarter may prove to have been an outlier, but there are signs that growth will continue. CEO Craig Menear said, “Our recent customer survey work tells us that customers have a continued willingness to take on both indoor and outdoor projects in the near term.” As ordering and purchasing becomes easier, and as customers become more comfortable with do-it-yourself home improvement, the company grows its loyal customer base.

The work Home Depot put into its channels across the board, including opening new regional fulfillment centers, positions it for additional growth even now that people are out of their homes and spending on other categories. With COVID-19 still uncontained and general uncertainty in the market, Home Depot declined to provide a business outlook. However, investors can expect sales to remain elevated, though the rate of growth will likely come down.

Lowe's employee in faucet aisle

Image source: Lowe’s.

Closing the gap

Lowe’s has gone through a similar transformation over the past few years. After playing second fiddle to Home Depot for decades, the company hired Marvin Ellison in 2018 to preside over the company’s move into digital. Lowe’s has more than 2,200 stores, up from 1,977 at the beginning of fiscal 2020, and the retailer is catching up to the footprint enjoyed by its rival. Lowe’s revamped its entire digital portfolio in 2019 and moved its website to Google Cloud, and it’s in the process of investing $1.7 billion in its supply chain over a five-year period. Another innovation — and there are many — is a new labor scheduling system that better aligns store associate hours with high-traffic times.

U.S. comps grew a tremendous 35% in the fiscal second quarter ended July 31, fueled by a 135% increase in digital sales. There were substantial increases in DIY, Pro, and millennial shoppers, which is another strong sign that sales will continue to rise going forward. While the growth will moderate — analysts expect revenue to increase 16% year over year in the fiscal third quarter — these trends will fuel results at the home improvement chain for a long time.

Are they both good investments?

Shares of Lowe’s and Home Depot have put up comparable gains in 2020 year to date, but the former still boasts the cheaper valuation at 21 times trailing earnings. Home Depot trades a slight premium of 25 times.

HD Chart

Data by YCharts.

Regardless of these minor differences, both companies have a tremendous opportunity ahead of them. Investors just need to remember that even these leading retailers will see growth gradually return to normal levels.

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