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Lowe's vs. Home Depot
Amid renovation boom, competition between home improvement leaders heats up.
May 21, 2002: 10:49 AM EDT

NEW YORK (CNN/Money) - Lured by low home-equity loan rates and rising home values, Americans are renovating at a brisk clip. The nation's biggest home improvement chains, The Home Depot and Lowe's, are reaping the benefits.

The two companies sell virtually the same products to similar customers at about the same prices. But Lowe's is expanding at a faster rate and is beginning to grab a lot of attention from customers and investors.

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Wall Street expects Lowe's to post annual earnings per share growth of about 30 percent compared with 20 percent for Home Depot. And Lowe's stock is the cheaper of the two relative to earnings, some industry analysts said.

On Monday, Wilkesboro, N.C.-based Lowe's Companies reported a 53 percent jump in fiscal first-quarter profit, breezing past Wall Street estimates, and a 7.5 percent increase in sales at stores open at least a year.

Home Depot (HD: down $2.66 to $45.84, Research, Estimates), based in Atlanta, reported a 35 percent jump in first-quarter earnings Tuesday, beating Wall Street forecasts by three cents a share.

"I like both stocks, but between the two, I favor Lowe's because it's capable of growing at a faster rate and it has a lower multiple on its earnings," said David Campbell, an analyst at Davenport & Co.

For the quarter ended May 3, Lowe's (LOW: up $0.07 to $46.87, Research, Estimates) reported earnings of $345.8 million, or 44 cents a share, up from $225.3 million, or 29 cents a share, a year earlier. Analysts had expected 36 cents a share. And Lowe's gave a bullish outlook, saying it expects full-year earnings will beat analyst estimates and that same store sales will rise 5 percent.

Home Depot reported earnings of $856 million, or 36 cents a share, for its first quarter ended May 5, up from $632 million, or 27 cents a share, a year earlier. Analysts polled by earnings tracker First Call expected a profit of 33 cents a share.

Both Lowe's and Home Depot sell building and plumbing products, paint and hardware, but Lowe's has a wider offering of appliances and does a better job selling them, analysts said. Additionally, Lowe's tries to make itself more appealing to women shoppers than does Home Depot, placing more of an emphasis on decorative items.

"You can't get shower curtains in a Home Depot. You can at Lowe's," said Colin McGranahan, an analyst at Sanford C. Bernstein.

The smaller Lowe's appears to have more room to grow and has been more aggressive in opening stores than Home Depot.

Lowe's said Monday it opened 46 stores in the quarter, giving it a total of 785 nationwide. Many of those new stores represent new markets for Lowe's, but are in neighborhoods where Home Depot, which had 1,333 total stores at the end of last year, is entrenched.

Lowe's is also opening more stores in urban areas, where it believes volume may act as a hedge against a falloff in home improvement, company spokeswoman Chris Ahearn said.

"They're at different points in their life cycle. Home Depot is in all these major urban markets and has been for quite a while," McGranahan said. "That's what Lowe's is about -- entering markets like Long Island and Boston .They are adding more productive, more profitable stores to the mix."

Ahearn also justified the company's expansion, saying Americans' tendency to turn inward toward their homes and family during tough times would boost sales as evidenced by the September terrorist attacks.

"Historically we have seen strong home improvement spending in the wake of a slow economy," Ahearn said. "The stock market has been less secure in the last 18 months or so than it had previously been. So instead of the stock market, people were investing in their homes."

Lowe's also emphasizes customer service, which McGranahan said is slipping a bit at some Home Depot stores, which are running at full capacity in some locales.

Home Depot, on the other hand, has worked hard to cut costs and streamline inventory in the last year or two. Instead of aggressive store expansion, much of the company's strategy now revolves around services, such as specialized help for commercial builders and contractors.

A Home Depot spokesman was not immediately available for comment Tuesday.

The company said Tuesday it opened 57 stores in the first quarter, a company record, while also expanding services and streamlining in an effort to cut costs and boost the bottom line. CEO Robert Nardelli said in a statement Tuesday that the company is in its strongest financial condition ever .

"Home Depot has been improving the supply chain and rolling out new initiatives," said Noel DeDora, co-manager of the Fremont New Era Value Fund, which holds Home Depot stock, but does not own Lowe's. "What they're doing is pumping more product through their pipeline. It's a classic sales technique."

Both companies have benefited from a home improvement boom following the September 11 terrorist attacks on the United States as Americans turned toward the comfort of home and familiar surroundings.

Lowe's stock is up 46 percent since Sept. 10. Home Depot's stock has risen 20 percent in the same period.

Lowe's stock trades at a slightly lower price-to-earnings multiple than Home Depot's. Lowe's shares trade at 27 times the current year's estimates compared with Home Depot's, which trade at 29 times estimates.

Crit Thomas, director of growth equity for National City Investment Management, which owns both companies, said Lowe's would be less exposed to a slowdown in home improvement than Home Depot because its has more room to expand.

"Home Depot is more susceptible to a slowing and spending than Lowe's," Thomas said. "My thinking is that Lowe's is right now a unit growth story. Their growth is predicated on how many stores they're going to put in the ground, wheras Home Depot is more of a margin expansion story...They're trying to make the store base run more efficiently."

Analysts said they aren't overly worried about how the companies will fare if mortgage rates rise and the economy stalls again. Both companies, the analysts said, would simply take more market share from a dwindling number of independent hardware store operators. The two companies combined control nearly a quarter of the home improvement retail market.

Ahearn said the company is "cautiously watching" economic indicators though, especially the unemployment rate and housing starts, for any change in consumer behavior.  Top of page