Forget Lowe, Home Depot is a better retail stock – The Fool Motley

The two major home improvement retailers have been good places to park money over the years. Lowe & # 39; s (NYSE: LOW) and Home Depot (NYSE: HD) have benefited from positive homeownership trends and, more recently, from higher home prices, which has encouraged more homeowners to stay where they are and to improve their housing rather than moving.

In the last five years, shareholder money has more than doubled. Home Depot has a slight edge, beating the Lowe stock's return from 126% to 110%. One of the reasons is that Lowe's suffered from operational issues that put pressure on revenue growth and profits.

Figures reveal two completely different companies

Recent operational performance shows Home Depot is a better managed company. In 2018, Lowe's revenues increased by 3.9%, while Home Depot's sales increased by 7.2%. In the last quarter of the year, Lowe's recorded only 1.7% growth in same-store sales, but Home Depot's sales growth was greater than 3.2%.

The slower growth of Lowe was not based on low traffic but on several runtime problems throughout the company. Management cited inefficient inventory management, poor customer service, poor product mix and other issues of execution.

These problems are evident in the great disparity between the margins of the two companies. In 2018, Lowe's announced a gross margin of 32.1% and an operating margin of 5.6% – both figures down from 2017 levels.

At the same time, Home Depot 's gross margin improved slightly to 34.3% last year and the operating margin remained stable at 14.3%. The higher margins of Home Depot are the sign of better store performance and more efficient inventory management.

Better execution leads to better stock market returns

It is telling to see the gap that separates these two home improvement stores, all the more so as they serve the same market and benefit from the same housing trends. The difference in performance shows that not all companies are identical, even those that compete in the same sector and are similar on the surface. Before investing in an action, it's helpful to look under the numbers and see what's really going on.

Both companies have increased their revenues at about the same rate over the last five years. However, growth in Lowe's operating income began to be lower than that of Home Depot in 2016. A deceleration in operating profit growth is a sign of excessive operating expenses. This was the early sign that Lowe had run problems.

LOW Operating Income (TTM) data by YCharts.

Lowe's management announced during the third quarter teleconference of 2018 that she had a plan to resolve the problems of execution. However, an analyst at Barclays was not impressed and still downgraded the title. The analyst said that while Lowe may be able to narrow the gap to Home Depot, recovery initiatives focused on repairing workmanship tend to take some time. In other words, Lowe's problems will probably take more than a year to resolve.

Other analysts seem to have the same opinion, while consensus analysts estimate that Lowe's revenue will grow 1.8% in fiscal year 2020 (through January), while analysts expect Home Depot to maintain its faster pace of growth at 3.4% this year.

This is not a good time for Lowe to have to spend resources to solve problems that she should not have at the moment. Because Home Depot is up and running, it is investing in areas that are widening its gap, especially in the digital sector. Team Orange recorded an online sales growth rate of 23% in the fourth quarter, compared to only 11% for Team Blue.

Lowe's will eventually solve the problems, but in the meantime, shareholders should stay with the company that has provided more consistent results, especially since the two shares are trading at roughly the same multiple of 18 based on analysts' earnings estimates.

John Ballard has no position in any of the actions mentioned. The Motley Fool recommends Home Depot and Lowe's. Motley Fool has a disclosure policy.