It's not easy living under the shadow of a more efficient retailing giant. Just ask Lowe's (NYSE: LOW).
The home-improvement industry's second-biggest company recently posted a strong uptick in its sales growth pace along with expanded profitability. Yet its results were a disappointment in comparison to Home Depot's (NYSE: HD). Below, we'll look at a few of the key ways Home Depot widened its lead over Lowe's this past quarter.
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Lowe's comparable-store sales growth was 4.5%. That was a solid improvement over the prior quarter's 2% uptick but still ended far behind Home Depot's pace. The home-improvement leader managed a 5.5% jump in the first quarter and a 6.3% bounce in the second quarter.
What must worry Lowe's management even more is the fact that its chief competitor's gains are driven by higher customer traffic. Home Depot's transaction growth sped up to a 2.8% rate from 1.6% during the key spring selling season.
Meanwhile, Home Depot benefited from increased market share at the professional market segment that both retailers are targeting right now. Its pro-heavy categories were some of its strongest ones, and Home Depot big-ticket purchases (of over $900) spiked higher by 12%.
A higher margin
Both companies achieved the same 34% gross profit margin during the quarter. Don't let that similarity convince you that the two are comparable when it comes to profitability, though.
Home Depot's operating income started the year at a higher percentage of sales and the line item has expanded at quicker pace than sales over the last six months. As a result, operating margin has improved to a hefty 15% of sales from 14.6%.
Lowe's comparable figure has held steady at about 11% of sales this year and is in the single digits on a trailing-12-month basis.
Home Depot executives aren't shy about expressing optimism about their business momentum. "Year to date," CFO Carl Tome said in a conference call with analysts, "our sales and earnings per share have exceeded our expectation."
The company responded to that surprising growth by boosting full-year comps guidance to 5.5% from the 4.6% rate management had issued three months before. They also visited the credit markets again, taking out $2 billion of new loans that they directed back to shareholders in the form of stock repurchases. Home Depot is now targeting a 13% profit spike, up from the prior 11% forecast.
Lowe's CEO Robert Niblock, on the other hand, said recent operating trends were disappointing. "Our results were below our expectations in the first half of the year," he said in a press release.
As a result, the company reduced its new-store launch target to 25 from 35 while lowering its profitability forecast.
Lowe's plan to recapture momentum includes increasing operating hours for many of its stores and speeding up its push into the pro contractor segment.
Shareholders will be watching for signs that the moves are helping it close the widening market share gap with Home Depot, and comps are the best metrics to follow there. On the other hand, Lowe's warned investors that this latest battle will require that it sacrifice operating profit margin at least over the short term.
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