The home improvement industry has been experiencing surging sales since the onset of the coronavirus pandemic. Earlier in May, Home Depot (NYSE:HD) reported first-quarter results that were far better than expected. Similarly, when Lowe's (NYSE:LOW) reported first-quarter results, it beat analyst estimates by a wide margin.
Using those results, let's try to uncover whether Lowe's gained market share in a quarter where the home improvement market grew robustly overall.
Taking market share
In a direct comparison, Home Depot grew sales by 32.7% year over year in the first quarter, and Lowe's increased sales by 24.1% from the same quarter last year. Looking at the results head to head, the indication is that Home Depot increased revenue much faster than Lowe's. And in fact, Home Depot CEO Craig Menear said in the first-quarter conference call that "it appears that we picked up about 170 points in share overall, based on the March data that was put out by the government."
The home improvement market is worth an estimated $800 billion annually. Image source: Getty Images.
Still, the home improvement market is bigger than just Home Depot and Lowe's. So it could very well be the case that each company gained market share in the $800 billion home improvement market in the first quarter.
Here's what Lowe's management had to say in the first-quarter press release that accompanied its earnings announcement: "Total sales for the first quarter were $24.4 billion compared to $19.7 billion in the first quarter of 2020, and comparable sales increased 25.9%. Comparable sales for the U.S. home improvement business increased 24.4% for the first quarter."
So, Lowe's too is saying that it gained market share in the first quarter. By the looks of it, Lowe's picked up about 150 basis points in share. Since both large retailers are gaining market share, it could be at the expense of smaller retailers that either didn't survive the pandemic or didn't have the capital to adapt the way Home Depot and Lowe's did.
Image source: Getty Images.
Operating efficiently
Lowe's management said it feels that, while the macro outlook remains volatile, it can continue taking market share. But, importantly, it believes it can do this while improving its operating profit margin. In other words, it's not going to rely heavily on promotions, lower prices, or other means of gaining sales at the expense of profits.
Lowe's is confident its Total Home strategy initiative will allow it to gain market share and enhance profit margins. As part of the program, Lowe's is enhancing its investment catering to the professional customer, online capabilities, installation services, localization, and increasing product assortment.
In the first-quarter conference call, Lowe's management sounded confident in its ability to achieve two objectives in 2021: To gain market share and to improve operating profit margin. Management acknowledged that consumer behavior is too uncertain to predict for the rest of the year, but taking market share and improving margins are two things it feels it can control.
Investor takeaway
Over the last decade, Lowe's has averaged an operating profit margin of 7.5%. Its target for 2021 is to hit 12%. In the first quarter, its operating profit margin came in at 12.42%. Lowe's reiterated the positive outlook for the rest of 2021 by saying: "Better-than-expected year-to-date results and a supportive macroeconomic backdrop build the company's confidence in its ability to deliver strong results for the fiscal year, including continued market share gains and the achievement of a 12% operating margin."
Even at the average operating profit margin of 7.5%, Lowe's grew earnings per share at a compounded annual rate of 18.5% over the last decade. If it can achieve and sustain an operating profit margin north of 10% and maintain mid-single-digit revenue growth, investors could be in line for healthy returns. Therefore, if you haven't already, you should consider adding shares of Lowe's to your portfolio.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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May 28, 2021 at 07:59PM
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