Why Was Home Depot More Profitable than Lowe’s in 1Q17?

In 1Q17, Home Depot (HD) posted a gross margin, EBITDA (earnings before interest, tax, depreciation, and amortization) margin, and net margin of 34.1%, 16.1%, and 8.4%, respectively. In comparison, in 1Q16, these margins were at 34.2%, 15.4%, and 7.9%, respectively.

Despite the 0.1% decline in gross margins, Home Depot’s EBITDA margins expanded 0.7% due to lower G&A (general and administrative) expenses. The G&A expenses fell from 18.8% in 1Q16 to 18.3% in 1Q17. During the quarter, the net margins also expanded 0.5% due to a fall in the effective tax rate. The company’s effective tax rate was at 35.2% in 1Q17 compared to 36.5% in 1Q17.

For the next four quarters, analysts are expecting Home Depot to post gross margin, EBITDA margin, and net margin of 34%, 16.7%, and 8.7%, respectively.

In 1Q17, Lowe’s (LOW) posted a gross margin, EBITDA margin, and net margin of 34.4%, 11.6%, and 5.2%, respectively. In comparison, these margins stood at 35%, 11.9%, and 5.2%, respectively, in 1Q16.

The negative impact of product mix and the acquisition of RONA lowered gross margins by 0.35%, while the rest of the 0.25% decline came from promotions, inflation in lumber, and increased investments in major product categories. Lowe’s EBITDA margin fell 0.3% due to a rise in SG&A expenses. However, some of the declines were offset by lower labor expenses due to the implementation of a new store staffing model. The net margin remained unchanged. The decline in EBITDA margins was offset by lower D&A (depreciation and amortization) expenses and lower effective tax rates.

For the next four quarters, analysts are expecting Lowe’s to post gross margin, EBITDA margin, and net margin of 34.4%, 12.5%, and 5.8%, respectively.

During the quarter, Williams-Sonoma (WSM) posted net margins of 4.0%, while Bed Bath & Beyond (BBBY) is expected to post a net margin of 3.4%.

Next, we’ll look at Home Depot and Lowe’s 1Q17 earnings.