Home Depot & Lowe's: Best Retail Stocks For Your Portfolio?

Spring time brings with it the fervor to renovate/remodel homes as well as pick up gardening gear. Here, the role of Home Improvement retailers like The Home Depot Inc. (NYSE:HD) and Lowe’s Companies Inc. (NYSE:LOW) begins as they are one-stop shops for the do-it-yourself (DIY) projects.

Here, we must point out the impact that digitization has left on every aspect of retailing, with the home improvement sector being no exception. Though home improvement brands and retailers were not keen on ecommerce in the initial phase of the digital revolution, the advancement in technology and shifting consumer behavior gradually changed the scenario.

Today, home improvement retailers are steadfastly developing their interconnected capabilities as they believe that in the evolved retail space both digital and physical stores go hand in hand. However, the role of ecommerce for home improvement retailers varies largely from that of other department or apparel store retailers.

In comparison, we note that online stores are almost replacing department/apparel stores as consumers prefer to shop for their clothing, beauty, footwear and even grocery needs online than stepping out. However, this is not the case for home improvement stores as homeowners use the digital channels to research, accumulate information and plan their shopping phases. Even today, digital transactions or ecommerce remains a small percentage of home improvement sales.

Even as the role of ecommerce for home improvement widens, it is noted that the purchases made online are mostly picked up from stores and consumers generally end up buying more from the store on their pickup visits. The growth of interconnected capabilities in home improvement becomes more apparent as we see Home Depot, a leading home improvement retailer, constantly invest in content, develop its website and improve mobile experience to provide better customer experience. The company recorded a 21.5% increase in online sales and double-digit online traffic growth in the first quarter.

Further, the company’s interconnected strategy goes beyond the dot.com investment as it continues to invest in fulfillment options to cater to customer demand. One such option is the new customer order management system (COM), which will be fully rolled out in its U.S. stores by year-end 2016. Not only this, the company has launched the Buy Online Deliver From Store (BODFS) capability, which will enhance the delivery process.

No doubt, the home improvement stores remain more advantageously placed in this evolving world, where online sales have gulped the physical existence of department/apparel stores. We believe, even in the future, this scenario won’t change much as buying the latest shirt or smartphone online is easier than deciding on gear meant for home and garden. Additionally, home and garden needs are generally not on top of consumers’ minds while they make online purchases.

That said, we will discuss a couple of home improvement stocks that can fit your portfolio.

Let’s start with the industry-leader, Home Depot, which carries a Zacks Rank #2 (Buy) and delivered better-than-expected top and bottom lines for first-quarter fiscal 2016. Adjusted earnings of $1.44 per share increased 19% from the year-ago quarter and beat the Zacks Consensus Estimate of $1.33, while sales advanced 9% to $22,762 million from the year-ago quarter. Results benefited from the company’s focus on improving customer experience, solid execution and broad-based growth across the store, alongside consistent housing market recovery.

Following a strong quarter, the company raised its sales, comps and earnings forecasts for fiscal 2016. Consequently, the company’s estimates moved up. Additionally, the world’s largest home improvement retailer has been reporting strong financial statistics since 2008, with steady improvement in revenue, EPS and net income. The company delivered an average positive earnings surprise of 4.2% in the trailing four quarters. (Read more: Home Depot Raises FY16 Outlook as Q1 Earnings Beat)

Next, Lowe’s – the biggest competitor of Home Depot – also reported an earnings beat for the first quarter of fiscal 2016 and holds a Zacks Rank #2. The company’s earnings increased 24.3% year over year to 87 cents and surpassed the Zacks Consensus Estimate of 85 cents. Total revenue rose 7.8% year over year to $15,234 million. The company’s sales gained from its efforts to provide a better omni-channel customer experience, with strength in both indoor and outdoor categories. Also, Lowe’s provided a robust guidance for fiscal 2016 that led to an upside in estimates. Moreover, the company has delivered an average positive earnings surprise of 0.6% in the trailing four quarters. (Read more: Lowe's Beats on Earnings in Q1, FY16 Outlook Robust)

With this, it is apparent that the home improvement stocks discussed above hold the potential to bring solid returns to investors when the other department/apparel retailers are struggling to hold their market share.


HOME DEPOT (HD): Free Stock Analysis Report

LOWES COS (LOW): Free Stock Analysis Report

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