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What Factors Helped Home Depot Be More Profitable than Lowe’s?

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HD’s 2Q16 performance

In 2Q16, Home Depot’s (HD) gross margins were constant at 33.7%. However, its EBITDA (earnings before interest, tax, amortization, and depreciation) margins and net margins expanded from 16.9% and 8.9% in 2Q15 to 17.4% and 9.2%, respectively.

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Factors that affected HD’s profitability

The acquisition of Interline contracted HD’s gross margins by 0.22%. This was offset by expansion in the supply chain, increased productivity, and lower fuel costs. The initiatives taken by HD to control its expenses helped the company in expanding its EBITDA margins by 0.5%. The decline in its effective tax rate from 37.3% in 2Q15 to 37% expanded net margins by 0.3% to 9.2%.

Outlook

Improvements in the supply chain, increased productivity, and sales leverage from positive same-store sales growth are expected to boost HD’s profitability in the next four quarters. Analysts are expecting HD’s net margins to expand by 0.5%, 0.4%, 0.3%, and 0.4% in 3Q16, 4Q16, 1Q17, and 2Q17, respectively. Home Depot is expected to post net margins of 8.4%, 7.4%, 8.3%, and 9.6%, in 3Q16, 4Q16, 1Q17, and 2Q17, respectively.

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LOW’s 2Q16 performance

In 2Q16, Lowe’s (LOW) gross margin, EBITDA margins, and net margins contracted by 0.1%, 0.6%, and 0.1% to 34.4%, 13.1%, and 6.4%, respectively. The higher labor expenses due to rising labor wages, acquisition of RONA, and increase in SG&A (selling, general, and administrative) expenses had negatively impacted the profitability of LOW.

LOW’s outlook

Analysts are expecting LOW to register net margins of 5.3%, 4.4%, 5.4%, and 7% in 3Q16, 4Q16, 1Q17, and 2Q17, respectively. This represents an expansion of 0.2% in 3Q16, 4Q16, and 1Q17, respectively, while in 2Q17, the net margins are expected to expand by 0.6%. Analysts are expecting HD to enjoy higher profitability in the next four quarters compared with LOW.

Notably, HD along with LOW, Bed Bath & Beyond (BBBY), and Williams-Sonoma (WSM) form 2.2% of the holdings of the iShares Russell 1000 Growth ETF (IWF).

Next, we will look at EPS and EPS growth of Home Depot and Lowe’s.

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