Modern Monopolies: HD & Low

Investment Analysis Clubs Liquid Lounge
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Revenue decline
The home improvement trend (especially DIY market) has at last showing weakness and it is reflected in both LOW & HD revenues. For ex: LOW’s Y-o-y the recent quarter revenue is down 12.8% and for 9 months it is down 9.2%

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In Feb, as part of 2024 Q4 company will provide guidance for 2025. I expect further sales decline in 2025.

Buybacks

Seth Ian Sigman: how do you think about the pace of buybacks from here?

Brandon J. Sink -CFO
Seth, this is Brandon. So our capital allocation priorities unchanged. We’re going to continue to invest in the business in high-return projects,
targeting a 35% dividend payout ratio and funneling the remainder to share repurchases. As I mentioned in my prepared remarks, we do expect
funding and share repurchases through operating cash flow here in the near term and expect modest if any share repo in Q4 also expect to be in
line with our stated leverage target at the end of the year. So we’re also looking at our debt towers, paying those off as they mature. We have $500
million this past Q3. We have $450 million coming due in 2024, and we remain committed to our BBB+ credit rating and expect to manage our leverage accordingly.

In nutshell, buybacks are going to slow a lot. Why it matters? The below tables shows how consistently LOW’s bought back shares. In absolute terms, they have repurchased 883 million shares from 2010 Jan to Nov-2023 and reduced over 60% outstanding shares. All the while increasing sales ($47.22 to $97 (of course expect it to be down by $10 B, and dividend ($0.355 to $4.4)

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It is reflected in their share price from low 20’s to 200 (10x, a ten bagger)

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Now, Both HD and LOW enjoy healthy gross margin and it is pretty consistent over a decade. However, HD, has better operating and net profit margin over LOW, hence higher valuation.

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LOW’s relative poor economics, and high reliance on DIY 75% (Do-it-yourself) market vs PRO’s 25% (relatively stable) and investments in their supply chain, IT systems and lean buyback means there is a potential stock price could face some headwind’s.

Channeling Buffett, I am rooting for the stock price to go to $100!!!

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in all the elements of running an improved business from a merchandising to operations, supply chain, but also the technology project list over the next 3 to 5 years is robust, and it’s going to allow us to continue to find ways to drive profitability

Whenever I see retailers talk about how technology is going to drive profitability and they are moving away from 30 year old systems, K-Mart comes to my mind. K-Mart changing their ERP system before holiday season doomed them. Still some of my customers want to move to new systems before their peak business period amazes me. CEO’s have a tunnel vision of everything going correct.

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Interest rate cuts in the past were beneficial to the home improvement sector. The stocks are at breakout point. Will you buy?

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LOW HD
PE 22.4 28
Dividend 4.6 9
Dividend Yield 1.70% 2.19%
Shares reduced 25.10% 8.60%
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Lowe’s

Year Shares Outstanding (in millions) Percentage Change
2024 565 -1.91%
2023 576 -6.80%
2022 618 -10.43%
2021 690 -8.24%
2020 752 -2.21%
2019 769 -4.59%
2018 806 -3.01%
2017 831 -4.81%
2016 873 -4.90%
2015 918 -6.13%
2014 978 -6.59%
2013 1,047 -7.02%
2012 1,126 -9.92%
2011 1,250 -10.07%
2010 1,390 -5.18%

compare this to HD,

Year Shares Outstanding (in millions) Percentage Change
2024 991 -0.5%
2023 996 -2.5%
2022 1,022 -3.0%
2021 1,054 -1.9%
2020 1,074 -1.8%
2019 1,093 -4.0%
2018 1,137 -3.5%
2017 1,178 -4.2%
2016 1,229 -4.1%
2015 1,277 -4.3%
2014 1,338 -6.1%
2013 1,425 -5.0%
2012 1,499 -5.0%
2011 1,562 -5.2%
2010 1,648 -2.1%

$LOW is more aggressive in reducing its number of outstanding shares. At some point they will slowdown or completely stop the buyback and use dividends as a way to return cash. In any case, both these companies should be part of any long-term portfolio holding.

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Ok but earnings still mostly tied to new housing starts. A cyclical business expected to go up and down with interest rates.

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Not really. US has a very old housing stock. They are more leveraged to repair market. Look at their sales growth, margin over 10, 15 years you rill recognize how reliably they can make money on various market cycles.

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Yes, it isn’t about “new home construction”. Few people moving into a new home need to rip up the floors or change out the windows and doors. It’s the “moving” market that makes or breaks Home Depot and Lowe’s.

Unfortunately with lots of people sitting on 3% mortgages that market has been flattish for some time, and until rates decline to near that level it won’t rebound. There are always going to be some moves, of course: people get transferred or people retire and move elsewhere, but the day of “casual upgrading” have hit a roadblock, and it’s “interest rates.”

Give the warnings of tariffs and other macro moves I suspect that won’t change - unless we’re threatened by recession in which case the Fed will move quickly, with or without pressure from the administration.

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Look at their gross margin, that’s over 10 years. It is a wonder that both these business can earn 34% ~ 35% gross margin consistently.

HD

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LOW

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All I can say is, I am an idiot.

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New home construction starts a string of moves as vacancies are created as people move until some one moves from a rental and then a string of rental moves.

When people move they often make changes to suit their needs. That increases sales at places like Home Depot and Lowes.

If you have ever moved into a new construction home you know they are not move in ready. Window coverings, mail box, laundry hook ups, towel racks, fireplace mantle, plants, landscaping, etc. The list is long. Lots of trips to Home Depot et al.