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Why Home Depot Was More Profitable Than Lowe’s in 4Q17

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Home Depot’s margins

In 4Q17, Home Depot (HD) had a gross margin of 33.9%, an EBIT (earnings before interest and tax) margin of 13.4%, and a net margin of 7.4%. In 4Q16, those margins were 34%, 13.2%, and 7.9%, respectively.

Home Depot’s net margin declined in 4Q17 due to a lower gross margin and a higher effective tax rate. Its gross margin fell due to an increase in lower-margin, hurricane-related sales. The company’s effective tax rate was 39.6% compared to 35.2% in 4Q16. However, some of the declines were offset by lower operating expenses. Its SG&A (selling, general, and administrative) expenses decreased from 18.8% in 4Q16 to 18.6% in 4Q17. The D&A (depreciation and amortization) expenses declined from 2% of total sales in 4Q16 to 1.9%.

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Lowe’s 4Q17 margins

In 4Q17, Lowe’s Companies (LOW) had a gross margin of 33.7%, an EBIT margin of 7.5%, and a net margin of 4%. In 4Q16, those margins were 34.4%, 8.6%, and 4.8%, respectively.

Its net margins declined due to a lower gross margin, higher SG&A expenses, and a higher effective tax rate. Its gross margins declined due to an unfavorable product mix and rate perspective. An increase in its lower-margin appliances category negatively impacted its gross margins. However, some of the declines were offset by the benefits of its pricing optimization efforts. SG&A expenses increased from 24% in 4Q16 to 24.3% of total revenue in 4Q17. The increase was due to the one-time cash bonus for eligible hourly employees, an increase in delivery costs for appliances, and deleveraging in advertising. The effective tax rate was 41.3% for the quarter compared to 40.3% in 4Q16.

Peer comparisons and outlook

In 4Q17, Williams-Sonoma (WSM) and Bed Bath & Beyond (BBBY) are expected to post net margins of 8.4% and 5.3%, respectively.

Analysts are expecting Home Depot’s net margin to improve from 8.6% in 2017 to 10% in 2018. They’re expecting Lowe’s net margin to improve from 5.4% in 2017 to 6.3% in 2018.

Next, we’ll look at Home Depot’s and Lowe’s earnings in 4Q17.

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