- Home Depot has a Superior capital efficiency as compared to Lowe's.
- The company has consistently increased market share in the US and abroad.
- In addition, a fast growing online retail business should become a key driver for Home Depot stock.
For the past 10 years, Home Depot stock has consistently outperformed it's rival Lowes (NYSE:LOW). From the housing boom of 2003 - 2007, to the recession of 2008 - 2011 and during the recent recovery, Home Depot (NYSE:HD) stock has been a better investment than Lowe's.
While Home Depot stock has come out on the top in the past, can the stock continue to outperform Lowe's? Let's look at a few reasons why Home Depot stock looks set to outperform its rival.
Note: You might also be interested in '6 Issues To Consider Before Investing In Home Depot Stock'
Return on Capital Employed (ROCE) compares how efficiently two like companies are employing their capital. A company with a higher ROCE will generate higher returns from the same of amount of capital (equity + debt) than a company with a lower ROCE. For the past five years, Home Depot's ROCE has not only been significantly higher than Lowe's is but has also grown at a faster rate.
ROCE is a measurement of management effectiveness. Home Depot's management has demonstrated they are more effective at allocating capital than Lowe's. Barring a complete change in company leadership, Home Depot's superior management (as demonstrated with the growth in ROCE) will help generate superior returns compared to Lowe's.
Home Depot bears have mentioned the company's increasing capitalization ratio as a cause for concern. Though Home Depot's capitalization ratio has increased significantly over the past four quarters and is higher than Lowe's, the company has used the debt efficiently to generate returns. Investors should not worry about Home Depot's higher capitalization ratio since the company's management has continued to increase returns.
For any physical retailer, Same-Store Sales (SSS) growth or comparable sales growth is one of the most important metric. For two competing companies, the one with a higher SSS will be able to grow market share faster.
While Home Depot and Lowe's businesses are primarily focused on the United States, they both have an international presence. For the past four quarters, Home Depot has increased same store sales faster in the United States and internationally versus its rival. Please note that international sales are a small portion of total sales for both companies.
Home Depot's faster growth in same store sales means the company is growing market share faster than Lowe's and being very capital efficient. Home Depot is better utilizing existing stores as compared to Lowe's. A continuation of this trend will lead to superior investment returns.
The vast majority of sales, for Home Depot as well as Lowe's, occur in-person at their stores. however, similar to how electronics, diapers and other goods have increasingly shifted to online sales, tool, equipment and smaller home improvement items will follow soon.
For Q3 2015, Home Depot's digital business accounted for 5.1% of total sales; a 25% growth from year ago. Meanwhile, Lowe's online sales only accounted for 2.5% of total sales in 2015 Q3. Home Depot sells a higher percentage of merchandise online versus Lowe's and a significantly higher dollar amount.
Home Depot recently completed building two fulfillment centers to continue growing their online business. With three fulfillment centers now operating, Home Depot can deliver goods to 98% of the US population within 2 days.
Home Depot is already beating Lowe's in e-commerce and will continue to build upon it's strength with the newly completed fulfillment centers.
Home Depot stock has outperformed Lowe's the past 10 years and will likely continue to do so. Home Depot's management is very effective at capital allocation as shown with the increasing return on capital employed. Home Depot is beating Lowe's in physical stores with faster same store sales growth and also growing its online presence at a rapid rate.
If Home Depot continues these trends the Home Depot stock will likely outperform Lowe's stock in the coming quarters.