Home Depot vs. Lowe’s Analysis

Introduction
The home improvement sector of the economy is large with two major players in the industry and with many smaller local and regional competitors. These two major competitors are Home Depot and Lowe’s. These two companies account for over $110 billion in total sales each year. Even though sales have gone down over the past few years due to the downturn in the economy they have not gone down nearly as much as home sales and this is due to more people deciding to do more home improvements to their own home then buying a new home. Both of these companies have been able to keep up sales and increase them year over year by improving current stores and at the same time expanding both here in the United States and overseas.

Company introduction
Home Depot
The Home Depot also known as Home Depot is a retailer of home improvement and construction products and services. The Home Depot was founded in 1978. The Home Depot operates 2,242 stores across the United States in all 50 U.S. states, the District of Columbia, Puerto Rico, the Virgin Islands and Guam. Sales within the United States were over $77 billion in 2010. The Home Depot also operates internationally in Canada, Mexico and China. Lowe’s

Lowe’s Companies, Inc. is a retail home improvement and appliance stores and also does construction. Lowe’s was founded in 1946 in North Wilkesboro, North Carolina. Lowe’s operates 1,710 stores in the United States and 20 in Canada. Lowe’s had sales of over $47 billion in sales in 2010. Lowe’s has also expanded to Mexico and has plans to expand to Australia.

Industry
Due to the economic expansion over the 90s, the home improvement industry has experienced a rapid growth. Due to the wealth effect, consumers spent high amounts of cash and credit on improving their most prized and expensive possession, their homes. As a result, the home improvement industry experienced rapid expansion and growth. But this has all turned around in the late 2000’s with the current recession and has led the home improvement retail sector to decline and flatten out only recently have Home Depot and Lowe’s seen improvements within the industry. There have been other key external forces influencing the industry besides the macro economic cycles, including changing customer needs, increasing percentage of household expenditure on building, wide spread use of the internet, and consolidation within the industry which shifts the industry market structure to oligopoly, being only two major national competitors. The major factor be the worldwide recession.

Financial Analysis
Financial Statements
Both Home Depot and Lowe’s use FASB methods on their annual financial report, together with the comparable statement for prior years. They both use fair value method to report stock option expense; they both use FIFO method to record inventory. For goodwill, they both use the impairment method instead of amortization; when there’re acquisitions, they both use purchase method to report.

Ratio Analysis

Profit Margin
| 2008| 2009| 2010|
Home Depot| 5.44| 3.24| 3.96|
Lowe’s| 5.82| 4.55| 3.78|

Profit margin is a primary measure of a company’s operating performance. It describes the operating efficiency of a company by showing how much of each sales dollar ends up as net income. Both Home Depot and Lowe’s showed decreasing profit margin ratios but Lowe’s ratios were a little higher. That’s due to Lowe’s merchandise cost while they tried to keep at the same price level with Home Depot.

Gross Margin
| 2008| 2009| 2010|
Home Depot| 33.61| 33.65| 33.87|
Lowe’s| 34.64| 34.21| 34.86|

Gross margin shows the markup in price over the cost of goods sold. Both the companies had experienced increasing gross margin that is an indicator of their control over suppliers – since Home Depot and Lowe’s are the most largest companies in the home improvement industry, suppliers’ bargaining power is limited. At the same time, Lowe’s showed higher ratios than Home Depot, mainly because their relative lower cost. ROA

| 2008| 2009| 2010|
Home Depot| 9.50| 5.62| 6.41|
Lowe’s| 9.10| 6.73| 5.40|

ROA is considered the best overall indicator of the efficiency of assets used in a company. Home Depot and Lowe’s ROA ratio both moved down due to the downturn in the industry but Home Depot was able to improve 2010.

ROE
| 2008| 2009| 2010|
Home Depot| 33.97| 19.12| 19.81|
Lowe’s| 18.31| 12.87| 9.74|

This ratio is similar to ROA except that it shows only the return on the resource contributed by the shareholders. Home Depot maintained steady ratio the last two years while Lowe’s has been decreasing over the past three years.

Asset Turnover
| 2008| 2009| 2010|
Home Depot| 1.75| 1.73| 1.62|
Lowe’s| 1.56| 1.48| 1.43|

Asset turnover depicts investment efficiency, because it shows how many sales dollars are generated for every dollar invested in the company’s assets. Lowe’s had relatively lower asset turnover ratios than Home Depot because their recent investment in PP&E.

Current Ratio
| 2008| 2009| 2010|
Home Depot| 1.15| 1.20| 1.34|
Lowe’s| 1.12| 1.22| 1.32|

This ratio indicates a company’s liquidity. It depicts how many dollars of current assets exist for every dollar in current liabilities. The ratio is the higher, the better. Home Depot and Lowe’s has increasing current ratio while Home Depot has a slightly higher one.

Inventory Turnover
| 2008| 2009| 2010|
Home Depot| 4.38| 4.43| 4.30|
Lowe’s| 4.15| 3.87| 3.73|

This ratio is a good indicator of the relative liquidity of inventory. A high turnover ratio generally indicates efficient use of investment in inventory. Home Depot has a higher inventory turnover ratio that shows its higher operating efficiency .

Debt to Equity
| 2008| 2009| 2010|
Home Depot| 150.22| 131.56| 110.78|
Lowe’s| 91.76| 80.70| 73.08|

This ratio relates how much debt a company has in proportion to its equity. Home Depot has much higher debt to equity ratios than Lowe’s but it shows a decline in trend indicating that Home Depot financial health is getting better, this can also be said about Lowe’s.

Technical Analysis
Home Depot vs. Lowe’s
(http://www.dailyfinance.com/charts)

As you can see from the charts of the two companies, they tend to moved in the same direction as each other but Home Depot has a higher price compared to Lowes. Recommendation

Home Depot vs. Lowe’s
Overall recommendation would be Home Depot due to their higher dividend payout compared to Lowe’s, 2.8 compared to 1.8. But if you are looking for a company with less debt and liabilities then Lowe’s would be your choice for an investment.

Bibliography

Home Depot, Annual Reports,
http://ir.homedepot.com/phoenix.zhtml?c=63646&p=irol-reportsAnnual

Lowe’s, Annual Reports,
http://investor.shareholder.com/lowes/annual.cfm