Mad Money

Home Depot Vs. Lowe’s: The Rematch


Companies that out-execute the competition, Cramer said Tuesday, have stocks that outperform the competition. That’s certainly the case with Home Depot and Lowe’s.

Just look at the latest earnings reports: On Monday, Lowe’s disappointed Wall Street and blamed consumers for the poor results. LOW has dropped 10% since then. The very next day, though, Home Depot delivered a better-than-expected quarter, and investors responded by pushing HD up about 2.5%.

“Home Depot’s better than Lowe’s,” Cramer said, “both as a company and as a stock. I think the next stop’s $30.”

Model Home?

At the heart of any execution strategy is great management, and Home Depot has that in CEO Francis Blake. He’s done a great job of putting his company back on track, Cramer said, after six years of contemptible stewardship by Robert Nardelli. Blake’s top priority? Emphasizing the customer, a key component of retail that had escaped Nardelli.

Home Depot’s new boss also has implemented a restructuring plan to refocus the company and cut costs. Today’s earnings beat was proof of its success. Blake has flexed his merchandising skills, too, finding the right mix of high- and low-end products that customers want. In fact, HD said that last quarter was the best in recent history for exceptional in-stocking. Lastly, Blake knows the importance of another key retail component as well: inventory control. Even though sales slipped 9% for the quarter, inventories came down just as much.

How has Lowe’s been doing? Almost the exact opposite of Home Depot. Lowe’s merchandise skews to the higher end, and customers have shunned those items during the downturn. Inventories were up 3%, too, while sales declined almost 5%. And while Home Depot is shuttering stores – the smart move during a recession – Lowe’s plans to open as many as 66 new locations this year and 45 in 2010. It’s not unusual for retail managers to chase higher revenues through outlet expansion, but that doesn’t necessarily translate into higher profits, especially in this environment.

Cramer has been bullish on Home Depot for the dividend yield alone, but it’s come down to 3.3% from 4% as the share price has risen. Wall Street is finally catching on to the company’s renewed strength. Still, north of 3% is a decent offering from a retailer. And it isn’t too late to get in on HD. In addition to beating analysts’ estimates today, the company also raised guidance – even though we’re emerging from the worst economic contraction since the Great Depression.

“Can you imagine what will happen when things get better?” Cramer asked.

Home Depot, “the greatest retail revival I can recall,” he said, is a buy.

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