Slow Growth Is Putting Lowe's Companies Inc.'s Further Behind The Home Depot, Inc.

Source: Wikimedia Commons

After Lowe's reported revenue and earnings for the first quarter of its 2014 fiscal year on May 21, shares fell less than 1%. The company's results, which were mixed compared to analysts' estimates, suggest that while management has done well in minimizing costs, it couldn't keep up with the strong growth that Mr. Market expected. In light of this shortfall, is Lowe's still an attractive prospect for the Foolish investor, or should shareholders look to Home Depot for better returns?

Lowe's is doing well but not as well as investors hoped!
For the quarter, Lowe's reported revenue of $13.4 billion. Although this represents a 2% gain compared to the $13.1 billion management reported in the year-ago period, it fell almost 4% below the $13.9 billion analysts anticipated. According to the company's earnings release, its mediocre growth stemmed from poor winter weather, as evidenced by lower traffic and a decline in its "exterior categories." This was, however, partially offset by solid performance in the business' "indoor categories."

Source: Lowe's

From a revenue perspective, Lowe's just couldn't seem to please shareholders, but it did manage to compensate for this, to some extent, with stronger earnings. For the quarter, the business saw earnings per share come in at $0.61, $0.01 above forecasts and a whopping 24% greater than the $0.49 management reported for the first quarter of 2013.

In addition to benefiting from higher revenue, Lowe's saw its cost of goods sold fall from 65.2% of sales to 64.5% over the past year. This, in conjunction with a 7% reduction in share count, helped propel the home-improvement giant's earnings significantly.

But how does Lowe's stack up against the home-improvement king?
Over the past few years, Lowe's has done alright but has fallen short of Home Depot, its largest competitor. Between 2009 and 2013, Lowe's reported that revenue rose 13% from $47.2 billion to $53.4 billion. While aggregate comparable-store sales stayed roughly flat, the company's store count grew by 7% from 1,710 locations to 1,832 locations over this period; this means that store additions were the main driver to the business' increasing sales.

In the case of Home Depot, the situation was slightly different. Over the past five years, the world's largest home-improvement retailer saw revenue climb 19% from $66.2 billion to $78.8 billion. Unlike Lowe's, which benefited greatly from an increase in store count, Home Depot reported a less than 1% increase in its number of locations in operation. Rather, the main driver behind the business' success was its comparable-store sales, which grew, in aggregate, 11% during this time frame.

HD Revenue (Annual) Chart

Home Depot revenue (annual) data by YCharts

From a profitability perspective, Home Depot's performance has been even stronger. Between 2009 and 2013, the company grew its net income by a jaw-dropping 102% from $2.7 billion to $5.4 billion. This was due, in part, to the company's sales growth; but it can be mostly attributed to its selling, general, and administrative expenses falling from 24% of sales to 21.1%, while depreciation and amortization inched downward.

Lowe's also enjoyed a step-up in its net income but nowhere near the extent that Home Depot boasted. Over the past five years, Lowe's saw its bottom line rise 28% from $1.8 billion to $2.3 billion. Unlike Home Depot, Lowe's saw its cost structure improve at a much slower rate, with only its depreciation and amortization costs falling at a nice clip.

Foolish takeaway
Based on the data provided, it's clear that Lowe's had a less-than-ideal quarter, but its metrics weren't terrible by any means. As far as a long-term prospect, the company's growth has been acceptable, but investors looking for a growing enterprise might prefer to check out Home Depot instead. Despite being a larger business, Home Depot's earnings and revenue growth have outpaced Lowe's, which could serve as a sign that the future of the company will be brighter than that of its smaller peer.

Your cable company is scared, but you can get rich
With its faster growth, Home Depot looks set to continue delivering strong returns in the future, especially when placed next to Lowe's. However, there's another industry whose potential could be truly astronomical, and it's right in your living room!

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Daniel Jones has no position in any stocks mentioned. The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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