When it comes to home improvement, most Americans likely think of two major stores: The Home Depot and Lowe’s. These companies have quickly gained market share in the industry, leaving competitors behind. Together, they held an impressive 81% of the home improvement retail market share in 2017. In this article, I will provide a detailed analysis of these two dominant players, who essentially form a duopoly in the home improvement market.
The Home Depot, Inc.
Founded in 1978, The Home Depot is the largest low-cost home improvement retailer in the world. Listed on the New York Stock Exchange, the company offers a broad range of products, aiming to be a one-stop-shop for customers seeking building materials, home improvement products, lawn and garden items, and decor. It has over 2,300 stores across the U.S., Canada, Mexico, and three U.S. territories.
On average, a Home Depot store measures approximately 104,000 square feet of enclosed space and about 24,000 square feet of outside garden area, which is slightly smaller than the size of two football fields. The company also owns distribution and fulfilment centres.
The company houses exclusive third-party products like Ryobi and as well as house brands like Husky. With almost half of the home improvement market share in the U.S., The Home Depot has significant bargaining power to negotiate better prices with suppliers. This allows the retailer to offer competitive prices to consumers, who are more likely to choose the low-cost option. As a result, The Home Depot can continue to grow its market share and expand its business.
Despite marginal expansion in the number of stores from 2,284 in 2017 to 2,317 in 2021, revenue and net profit grew at a compound annual growth rate (CAGR) of 10.6% and 17.5% respectively between the same period, which is decent.
The company appears well-positioned to have another successful year in FY2022. Despite an inflationary business environment, the company was able to pass on the cost increases to consumers. Consequently, the number of customer transactions decreased by 5.3% year-on-year in 9M 2022. However, consumers are still willing to spend on home improvements. In fact, the average customer ticket increased by 9.7% YoY during the same period.
Professional customers made up of only 10% of the company’s customer base but contributed to half of its revenue. The Home Depot’s consistent performance is instrumental in allowing the company to pay a quarterly dividend since 1987.
Lowe’s Companies, Inc.
Lowe’s, established in 1921, is currently the world’s second-largest home improvement retailer, having lost its position as the largest retailer in the sector to its newer rival, The Home Depot.
Listed on the New York Stock Exchange, Lowe’s business operations are primarily in the U.S. Lowe’s stores tend to be bigger than those of The Home Depot. Like The Home Depot, Lowe’s offers a wide range of home improvement tools and services and carries its own brands such as Stainmaster carpets and Kobalt tools.
Lowe’s relies heavily on sales from DIY customers, which made up 75% of its Q3 2022 sales. This makes its business more susceptible to volatility when compared to The Home Depot. Nevertheless, Lowe’s has the potential to expand its market by catering to the professional customer segment.
Revenue and net profit grew at a CAGR of 8.9% and 25.4% respectively between 2017 and 2021. The drop in the net profit in 2018 was due to a one-off elimination of underperforming stores and non-core assets.
Revenue and net profit in 9M 2022 were down 0.4% and 24.3% year-on-year. The drop in the company’s 9M 2022 net profit was due to a US$2.1 billion impairment charge related to the sale of its Canadian retail business. The Canadian retail business is expected to represent less than 6% of the company’s revenue in 2022.
Despite lower customer transactions, ticket prices were higher in general as a result of inflation. The company’s comparable sales is expected to be flat or contract 1% year-on-year in 2022. Notably, the retailer has been paying an increasing dividend per share each year since going public in 1961.
Comparing The Home Depot vs Lowe’s
Both The Home Depot and Lowe’s have strong brand equity, allowing them to pass on inflation costs, supply chain disruptions, and raw material prices to customers. This is evident in their stable gross profit margins during the pandemic. As these companies continue to grow and improve operational efficiency through economies of scale, such as investing in supply chain infrastructure and establishing distribution centers, they will remain competitive in the home improvement market. This is reflected in their higher net profit margins during the pandemic.
The Home Depot currently has a larger market share, giving them an advantage in achieving economies of scale and resulting in a higher net profit margin compared to Lowe’s, as shown in the table below. Each company’s ability to position itself as the go-to store for professional customers will determine the extent of their growth.
| Gross Profit Margin | 2017 | 2018 | 2019 | 2020 | 2021 |
| The Home Depot | 34.0% | 34.3% | 34.1% | 34.0% | 33.6% |
| Lowe’s | 32.7% | 32.1% | 31.8% | 33.0% | 33.3% |
| Net Profit Margin | 2017 | 2018 | 2019 | 2020 | 2021 |
| The Home Depot | 8.6% | 10.3% | 10.2% | 9.7% | 10.9% |
| Lowe’s | 5.0% | 3.2% | 5.9% | 6.5% | 8.8% |
Both companies offer similar pricing for their products, with the exception of less popular items such as plumbing and electrical supplies. They have also invested in improving the online shopping experience for their customers, showing their commitment to the growing e-commerce market.
The fifth perspective
The Home Depot and Lowe’s are susceptible to economic downturns and fluctuations in the housing market. During times of high inflation, interest and mortgage rates, and soaring home prices, DIY customers may curtail their spending on home upgrades and renovation.
At the same time, the COVID-19 pandemic has brought about changes in how people view their homes. Despite the higher prices, consumers are still willing to pay for home improvement items and services, as indicated in the latest quarterly results of The Home Depot and Lowe’s. Even in a semi-cyclical market, these companies are expected to continue growing in the long run, especially with the current national housing shortage in the U.S.
These are both great companies. As both a (past) customer and an investor I personally prefer Home Depot. Given that their pricing is usually slightly better it’s amazing that Home Depot actually achieves better margins.
The only issue is that they have reached the point where the US market has become a duopoly, and Home Depot doesn’t seem as Lowe’s on expanding outside North America. I seem to recall that Lowe’s has been doing something with Bunning’s in Australia and B&Q in the U.K. Home Depot features in a lot of US TV shows and movies so they’re probably wasting the benefit from decades of product placement and brand equity.
Hi Jonathan,
Thanks for your insight. Lowe’s exited their business in Australia and I didn’t manage to find if they have any business dealings in the UK. Anyway, the future growth of these two companies looks solid.
My understanding (and my memory may be failing) was that Lowe’s were still sharing some of their house brand products with Bunning’s and B&Q (Australia and UK respectively). This was intended to increase economies of scale and reduce overall unit costs. I knew Lowe’s had exited the joint venture in Australia (which I think may also have been with Bunning’s/Wesfarmers), but thought that the product sharing was still ongoing.
Either way, both these companies seem like dividend stocks with limited scope for growth in their main market. Lowe’s looks like it is better value on paper, but the damper on both is the US withholding tax on dividends (and their current yields are already both quite low compared to what we can find closer to home). Home Depot’s share price trajectory has been amazing (and I wish I’d bought the shares back in 2012 or earlier), but I’m not convinced that will continue. However, it might be a good inflation hedge.
Thanks Jonathan for your additional input!