Lowe's "Runs A Tighter Ship" Than Home Depot

Unlike its biggest competitor in the home improvement retailing space – Home Depot Inc. (HD) – Lowe’s Cos. Inc. (LOW) doesn’t have to worry about management shake-ups, activist shareholders, liquidity issues and the indecisiveness of private equity. The sector may be suffering, but Lowe’s is not, and neither is its share price – at least not since mid-August, when much of the market plunged.

The company is executing in an environment that continues to signal something bad could be on the horizon, says Gimme Credit’s Carol Levenson.

The group’s director of research, known for her no-holds-barred commentary, says proceeds from a debt offering should ideally be spent on things other than stock buybacks, but Lowe’s decision to raise US$1.3-billion last week was nonetheless a wise move.

Borrowing more than enough to pay off its backup bank lines (it had US$555-million in commercial paper outstanding at the end of the fiscal second quarter) “may seem brilliant as time goes by, especially if even top tier commercial paper markets dry up,” Ms. Levenson told clients in a note.

While it remains to be seen how quickly Lowe’s will execute its new US$3-billion repurchase program after spending nearly US$2-billion doing the same in the past four quarters, she assumes the rest of its recently borrowed money will allow the company to maintain its current buyback pace.

Ms. Levenson also highlights Lowe’s view of subprime lending problems, which the company says is “regional” – limited to areas home to real estate bubbles like California and Florida. However, she is skeptical of this explanation, acknowledging that while bubbles may indeed be local, “tighter lending and consumer psychology is national.”

Nonetheless, Ms. Levenson says Lowe’s is superior to Home Depot on nearly every measure. “They’re both in the same boat regarding sensitivity to the housing market, but Lowe’s runs a tighter ship.”

However, she would prefer to see Lowe’s conserve more cash in a period when sales are uncertain, and suggests management may be underestimating the impact of the housing downturn.

LOW vs. HD 1-yr chart: