Lowe's Widens the Gap With Home Depot - in the Wrong Direction

Lowe’s Companies followed Home Depot to the tape Wednesday morning and delivered a markedly different quarter.

Adjusted earnings of $4.40 per share topped the Zacks Consensus Estimate of $4.22, but net sales of $25.96 billion fell short of the $26.13 billion consensus mark, a miss of roughly 0.7%, and comparable sales rose just 0.2%.

Management also trimmed its full-year outlook to the bottom of every previously guided range. Shares fell about 3.1% in pre-market trading. The contrast with Tuesday’s Home Depot print is stark, and it is the most important thing investors should take from this report.

A Comp Gap That Is Hard to Explain Away

Home Depot posted comparable sales of 1.7% — its best in four years. Lowe’s managed just 0.2%. That 150-basis-point gap is the widest between the two in recent memory, and it comes after both retailers reported identical 0.6% comps in the first quarter.

Management was candid about the cause. CEO Marvin Ellison noted that “sustained growth in Pro, Online and Home Services led to our fifth consecutive quarter of positive comp sales, despite pressure in discretionary DIY spending.” Five straight quarters of positive comps is a genuine achievement in this environment. But the composition matters: Lowe’s remains meaningfully more exposed to the DIY customer than Home Depot is, and DIY is precisely where the weakness sits.

Home Depot described “broad based demand” as customers engaged in smaller projects. Lowe’s described “persistent DIY macro pressures.” Same housing market, same quarter, two different customer bases — and the results followed the mix.

The Headline Growth Is Acquisition-Driven

Total sales rose 8.3% to $26 billion from $24 billion, which looks impressive next to Home Depot’s 5.7%. It isn’t a fair comparison. Lowe’s top line is being carried by the Foundation Building Materials and Artisan Design Group acquisitions, which don’t appear in comparable sales. Strip out the deals and the organic business grew 0.2%.

Those acquisitions are also showing up in the cost structure. Intangible amortization from the two deals added $96 million in pre-tax expense during the quarter. Total depreciation and amortization rose to 2.2% of sales from 1.91%, while net interest expense climbed to $374 million from $313 million — a direct consequence of the debt taken on to fund the purchases. Long-term debt now stands at $35.2 billion, up from $30.5 billion a year ago.

Margins Went the Wrong Way

This is where the quarter looks weakest. Gross margin fell 77 basis points to 33.04% from 33.81%, and operating margin dropped 81 basis points to 13.67% from 14.48%. Net earnings of $2.399 billion were essentially flat, and diluted EPS of $4.27 was exactly unchanged from a year ago. To management’s credit, SG&A improved to 17.17% of sales from 17.42% — real cost discipline. But it wasn’t nearly enough to offset the gross margin erosion.

Compare that to Home Depot, which expanded gross margin roughly 26 basis points and held operating margin decline to 20 basis points. Lowe’s margin compression was roughly four times worse.

The cash statement tells a similar story. Six-month operating cash flow fell to $7.0 billion from $7.6 billion, leaving free cash flow down roughly 10% year over year against a rising dividend — now $1.25 per quarter after May’s increase.

About That Tariff Benefit

Both retailers received IEEPA tariff refunds this quarter, and Lowe’s disclosed the impact explicitly: both GAAP and adjusted EPS include an $0.11 benefit from the refunds.

That single line reframes the beat. Back out the refund and adjusted EPS lands near $4.29 — still above the $4.22 consensus, but roughly 1% below the prior-year adjusted figure of $4.33. In other words, the underlying earnings power of the business declined year over year, and a one-time tariff recovery is what pushed the reported number into growth territory.

The Guidance Trim Is the Real Catalyst

Lowe’s LOW did not technically cut guidance below its prior range; it removed the upper half of every band. Total sales now sit at $92.0 billion (from $92.0–94.0 billion), comparable sales at flat (from flat to up 2%), operating margin at 11.2% (from 11.2–11.4%), and adjusted diluted EPS at approximately $12.25 (from $12.25–12.75).

Practically, that is a half-dollar reduction in the earnings ceiling and the elimination of any comp growth for the year. Home Depot, having beaten more convincingly, simply reaffirmed. When the weaker operator is also the one lowering the bar, the market’s response is predictable.

Read-Through for the Home Improvement Space

Taken together, these two prints resolve a question that has hung over the sector for two years. This is not a rising tide. Home Depot’s HD acceleration to 1.7% against Lowe’s 0.2% points to share shift and mix advantage rather than an industry-wide recovery.

The underlying macro is unchanged and still difficult: housing turnover remains depressed, the mortgage lock-in effect continues to keep homeowners in place, and discretionary big-ticket renovation demand has not returned. What has emerged is a clear split. Operators with heavier Pro, services and installed-sales exposure are growing. Operators leaning on the discretionary DIY customer are not.

Bottom Line

Lowe’s entered this report carrying a Zacks Rank #4 (Sell), with the consensus EPS estimate having been revised down slightly over the prior 30 days. Nothing in this print argues for that trend reversing. A revenue shortfall, an EPS beat that depends on a one-time tariff refund, 81 basis points of operating margin erosion, and a guidance trim to the low end are collectively the recipe for further negative revisions.

That said, this is not a broken company. The Total Home strategy is working where it has been aimed — Pro, online and home services are all growing, comps have now been positive for several quarters running, and the FBM and ADG acquisitions position Lowe’s better for an eventual Pro-led recovery. The stock touched a 52-week low last month, so expectations are hardly elevated.

But the near-term setup is unattractive. Until DIY demand stabilizes or the estimate-revision trend turns, Lowe’s looks like the second-best way to own a sector that is itself only stabilizing. Home Depot proved this week that the gap is real.

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This article originally published on Zacks Investment Research (zacks.com).

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