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Why Home Depot Was More Profitable than Lowe’s in 3Q16

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Home Depot’s 3Q16 performance

In 3Q16, Home Depot’s (HD) gross margins remained flat at 34.7% in comparison to 3Q15. However, its EBITDA (earnings before interest, tax, depreciation, and amortization) margin and net margin improved from 15.6% to 16.5% and 7.9% to 8.5%, respectively.

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Factors that affected HD’s profitability

The acquisition of Interline offset the expansion of gross margins due to improvement in productivity, the expansion of its supply chain, product mix, and improvements in inventory shrinkage. However, the decline in G&A (general and administrative) and interest expenses along with sales leverage due to positive same-store sales growth contributed to the expansion of Home Depot’s net margins.

Lowe’s 3Q16 performance

In 3Q16, Lowe’s (LOW) posted gross margins, EBITDA margins, and net margins of 34.4%, 11.5%, and 4.9%, respectively. Comparatively, the company posted 34.8%, 12%, and 5.1%, respectively in 3Q15.

Due to both accounting adjustments and its RONA business mix, LOW’s gross margin contracted. Despite sales leverage, Lowe’s EBITDA margins contracted due to the rise in SG&A expenses from 22.9% to 26% of the total revenue in 3Q16. Net margins were also affected by the rise in interest expenses, which were partially offset by a decline in depreciation and amortization expenses.

In 3Q16, Williams-Sonoma (WSM) posted gross margins, EBITDA margins, and net margins of 36.8%, 12.5%, and 5.6%, respectively.

Outlook

For the next four quarters, analysts are expecting Home Depot to post gross margins, EBITDA margins, and net margins of 34.2%, 16.5%, and 8.5%, respectively. Comparatively, in the corresponding quarters of the previous year, the company posted 34.2%, 16%, and 8.2%, respectively. The growth is expected to be driven by sales leverage and the optimization of its supply chain network.

Analysts are expecting Lowe’s to post gross margins, EBITDA margins, and net margins of 34.5%, 12.2%, and 5.6%, respectively. Comparatively, in the corresponding quarters of the previous year, the company posted 34.6%, 12%, and 5.3%, respectively. Despite the acquisition of RONA, analysts are expecting EBITDA and net margins to rise due to sales leverage and likely lower SG&A expenses.

Next, we’ll look at EPS for Home Depot and Lowe’s.

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