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Why Was Home Depot More Profitable than Lowe’s in 2Q17?

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Home Depot’s margins

Home Depot (HD) reported a gross margin, EBITDA (earnings before interest, tax, depreciation, and amortization) margin, and net margins of 33.7%, 17.7%, and 9.5%, respectively. The margins were at 33.7%, 17.2%, and 9.2%, respectively, in 2Q16.

During the quarter, the supply chain’s improved productivity was offset by the unfavorable product mix. The SG&A (selling, general, and administrative) expenses fell from 16.6% in 2Q16 to 16.2% of the total revenues. The sales leverage from positive SSSG (same-store sales growth) and true-up of bonus accruals lowered the company’s SG&A expenses. Due to the implementation of a new stock compensation accounting standard, the company’s effective tax rate fell from 37.0% to 36.6%. All of these factors helped boost the company’s net margins 0.3%.

For the next four quarters, analysts expect Home Depot to post a gross margin, EBITDA margin, and net margins of 34.1%, 16.8%, and 8.8%, respectively. In the same four quarters the previous year, the margins were at 34.1%, 16.5%, and 8.6%, respectively.

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Lowe’s margins

Lowe’s (LOW) posted a gross margin, EBITDA margin, and net margins of 34.2%, 14.2%, and 6.8%, respectively, in 2Q17. The margins were at 34.4%, 13.9%, and 6.7%, respectively, in 2Q16.

During the quarter, promotional initiatives, inflation, and an unfavorable product mix lowered the company’s gross margins 0.2%. The SG&A expenses fell from 21.2% in 2Q16 to 20.2%. The lower SG&A expenses were due to the sale of the company’s Australian joint venture and losses from the settlement of a foreign currency hedge during 2Q16.

During the quarter, the company’s D&A (depreciation and amortization) and interest expenses fell 0.2% and 0.1%, respectively. The lower expenses and effective tax rate helped Lowe’s net margins.

For the next four quarters, analysts expect Lowe’s to post a gross margin, EBITDA margin, and net margins of 34.3%, 12.2%, and 5.6%, respectively. In the same four quarters the previous year, the margins were at 34.3%, 12.2%, and 5.5%, respectively.

Peer comparisons

During 2Q17, Bed Bath & Beyond (BBBY) and Williams-Sonoma (WSM) posted a net margin of 3.1% and 4.4%, respectively.

In the next part, we’ll look at both companies’ earnings per share in 2Q17.

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