The rise of e-commerce in recent years has flipped the retail industry upside-down.
While some retailers have been destroyed, Home Depot Inc. (NSYE:HD) and Lowe’s Companies, Inc. (NYSE:LOW) have been able to fight off the attack led by Amazon.com Inc. (NASDAQ:AMZN).
The industry specific traits Home Depot and Lowe’s possess have made their businesses essentially Amazon-proof. So, let’s take a look at what they are.
First and foremost, Home Depot and Lowe’s sell a lot of items that can’t be shipped, such as paint and other potentially harmful chemicals, and large items that don’t make economic sense to ship. Even the great Amazon.com can’t offer free shipping on a 2×4 piece of wood, a large piece of plywood, drywall, a 50 gallon garbage can, or a wheelbarrow. These items are large, bulky and the shipping companies are going to charge a pretty penny to move this kind of merchandise. The issue for Amazon is that the high shipping costs make these items cheaper if bought at a Home Depot or Lowe’s location.
Amazon has been so successful because it has been able to offer customers the lowest prices. When it can’t do that, which is the case with these large bulk items sold at home improvement stores, customers will stick with the brick-and-mortar retailer.
Another issue Amazon can’t overcome is when something breaks and a homeowner needs rapid repair or replacement, whether it is a light, a door knob or the faucet. Quite simply, it needs to be fixed “NOW,” not in two to four days when the piece arrives in the mail. A customer wants a plugged toilet or a leaky sink fixed in a few hours, not in a few days due to delays in having a part shipped.
This is even more important in terms of contractors. Not only due contractors and customers want their projects completed quickly, but the contractor cannot afford to waste time waiting for an order to arrive in the mail. Time is money for contractors, so if that means they need to spend a few more bucks buying something in the store and having it now, as opposed to buying it online and having it in a few days, they are going to spend the extra money. Furthermore, 40% of Home Depot’s business now comes from its Pro Service Desk, which caters specifically to contractors.
And finally, my third reason why Home Depot and Lowe’s have been able to fight off the Amazon-affect is because a lot of home improvement projects are the type of purchases that need to be done in person. The color, material texture, smell and size of the product all need to be seen in person, not on a computer. Furthermore, not only does the customer want to see and feel the products, but in many cases she may even want to take samples home and test them out. Examples include paint swatches, flooring chips, pieces of marble or granite counter-tops.
Most of the items Amazon sells online can easily be returned because they don’t fit, don’t look right, or you just decide you no longer want them. But with home improvement projects, returning custom cut or colored items doesn’t really happen. Customers want to be sure they love everything about a product before buying it and the only way to do that is by seeing and feeling it in person.
While the shipping costs may come down and contractors could start shopping more online, customers will always want to stop by a store and see, feel and smell a product before spending thousands of dollars to renovate a bathroom unless they are confident they will like the final result.
As for which stock is a better buy, Home Depot or Lowe’s, I personally like Home Depot. While Lowe’s actually has a few more stores than Home Depot, HD is more than twice the size of Lowe’s in terms of market capitalization, while both boast the same price to earnings (P/E) ratio of 24. Home Depot also has a slightly higher dividend yield, 2.28% compared to 1.67%.
Home Depot and Lowe’s are selling the same things, so why would one be better than the other. The answer is management. Home Depot has a much better management team in place, plain and simple. Lowe’s runs profit margin and operating margins of 4.76% and 9.13%, Home Depot puts up 8.53% and 14.13%, respectively. Return on assets and return on equity for Lowe’s is 11.3% and 43.91%, while Home Depot comes in at 19.13% and 158.65%.
At the end of the day, Home Depot is just a better operator and one retail stock you could own for years to come.
At the time of this writing, Matt Thalman owned shares of Home Depot and Amazon.com. Follow him on Twitter at @mthalman5513.