2024-01-29 04:24:44 ET
Summary
- Home Depot and Lowe's look similar at first. The deeper we dig, the more hints we find that HD is of higher quality.
- HD outperformed LOW every single year except 2020 regarding same-store traffic growth.
- The balance sheets are better than many people think, although there are some concerns for LOW.
- Both companies generate high returns on capital but only HD grows the capital base (Capital Employed).
- My valuation analysis leaves me to assume that HD is a bit overvalued while LOW is undervalued at current prices.
Introduction
Over the past two months, I wrote several articles covering what I would call "retail" or "brick and mortar" businesses, including Starbucks (SBUX), Dollarama Inc. (TSX: DOL:CA )(DLMAF), Costco Wholesale (COST) and Walmart (WMT).
As a ( early disclosure ) shareholder of Home Depot (HD), I want to keep up my coverage of these retail-type businesses and share my opinion on HD and its major competitor Lowe's Companies (LOW) in this article.
I will skip a separate section for an overview of these two businesses and will give a quick overview here instead. HD and LOW are the two major home improvement retailers in the United States. As of right now, HD operates 2,333 stores in the U.S. while LOW operates 1,746 stores. HD also operates 182 stores in Canada and 137 stores in Mexico. LOW on the other hand ceased its operations in Mexico in 2019 and Canada in 2022 (more on that later) and solely operates in the U.S. at this point. In conclusion, HD and LOW are simple, predictable businesses that offer everything around "home improvement", something that will probably be in demand forever.
As I already wrote past articles, the key metrics we need to look out for when looking at a retailer are (1) Footprint growth (=store growth), (2) Traffic growth and (3) Pricing growth. The combination of (2) and (3) is usually referred to as "Comparable store sales growth" or "same-store-sales growth" which is one of the key reporting metrics for these types of businesses....
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For further details see:
Home Depot And Lowe's: A Textbook Example Of Quality Vs. Value