The COVID-19 pandemic has impacted the spending patterns of consumers. Due to work-from-home mandates and social distancing measures, people have been spending more time at their homes. They have shifted their discretionary spending from travel and outside dining to home goods and home improvement projects. The trend has favorably impacted companies like Home Depot, Lowe’s, Wayfair and RH.
We will use the TipRanks Stock Comparison tool to place Lowe’s and RH alongside each other to see which home goods stock offers a better investment opportunity.
Lowe’s (LOW)
Lowe’s is one of the leading home improvement retailers with 1,968 (as of July) home improvement and hardware stores in the US and Canada. The company has been experiencing impressive growth amid the pandemic as customers are remodeling their houses and creating workspaces in their homes amid the pandemic.
The company posted impressive results in 2Q FY20 (ended Jul. 31), with sales rising 30.1% year-over-year to $27.3 billion and adjusted EPS growing 74.4% year-over-year to $3.75. Comparable sales rose 34.2% driven by over 20% growth across all of Lowe’s merchandise categories. Comps for the Pro business grew in the mid-20s but the DIY (do-it-yourself) business performed even better.
E-commerce growth was one of the key driving factors for the company in 2Q. Lowe’s online sales increased 135% and accounted for 8% of the top line. The company completed the re-platforming of its site to the cloud in the second quarter and this helped in improving site functionality. It continues to drive online traffic by providing convenient shopping options like Buy Online Pickup in Store, curbside pickup, contactless self-service pickup lockers and direct-to-home delivery. (See LOW stock analysis on TipRanks)
The company is also investing in its supply chain infrastructure and revealed its plans to open 50 cross-dock delivery terminals, seven bulk distribution centers and four e-commerce fulfillment centers over the next 18 months. It continues to enhance its merchandise offerings with additions like EGO’s innovative battery-powered mowers, trimmers, chainsaws and blowers.
Lowe’s aims to increase the penetration of its Pro business through several initiatives, including the multi-year nationwide roll-out of a tool rental program. It has also launched an enhanced Pro loyalty program to attract professional buyers.
The company is gearing up for the crucial holiday season and plans to hire 20,000 associates across its US stores and regional distribution centers to support customer demand.
In September, Loop Capital analyst Laura Champine increased her price target for Lowe’s to $195 from $180 and reiterated a Buy rating. In a research note to investors, Champine stated that her updated valuation model assumes that DIY activity will continue to surge due to COVID-induced home improvement spending.
Champine estimates that consumer spending on home improvement will remain above historical levels for “many more quarters” and noted that Lowe’s tight inventory management should also limit discounting.
Lowe’s is scheduled to announce its 3Q results on Nov. 14. It currently scores a Strong Buy analyst consensus with 16 Buys versus 3 Holds. The average analyst price target of $185.50 indicates an upside potential of 19.1% over the coming year. Shares have advanced 30% so far this year.
RH (RH)
High-end home goods retailer RH (formerly Restoration Hardware) bounced back strongly in 2Q FY20 (ended Aug. 1), benefiting from the increased spending on home furnishings amid stay-at-home measures. The company operates 68 RH retail galleries, 38 outlets and 15 Waterworks showrooms in the US and Canada.
RH’s revenue increased 0.4% to $709.3 million in 2Q FY20 after declining 19.3% in 1Q FY20. However, it is notable that the revenue growth in 2Q lagged behind the rise in customer orders due to supply chain issues. RH expects its 3Q revenue to lag demand by 5 to 10 points and normalize in the fourth quarter as manufacturing and inventory receipts get in line with demand. Meanwhile, the company’s 2Q adjusted EPS surged 53% to $4.90.
The increase in RH’s earnings was driven by a significant expansion in its margins as the company continues to invest in its luxury brands. Gross margin increased to 46.9% in 2Q FY20 from 41.7% in 2Q FY19 and the adjusted operating margin jumped to 21.8% from 14.9%. The company expects to deliver an adjusted operating margin of 20% in FY20 with mid-single-digit revenue growth. In the long-term, RH sees the opportunity to expand its adjusted operating margin to 25%.
The company expects some level of elevated spending on home goods to continue through 2021. It anticipates gaining from strong real estate activity in second-home markets, an accelerated shift of families to larger suburban homes and the momentum in homebuilding.
RH now aims for net revenue growth of 8% to 12% and an adjusted net income increase of 15% to 20% over the long-term. It plans to open new design galleries in major markets with the goal of generating revenue of between $5 billion to $6 billion in North America, and has a vision to emerge as a $20 billion global brand.
To attract affluent customers, the company is creating hospitality experiences like RH Yountville restaurant, which integrates food, wine, art and design in the Napa Valley and RH3, the company’s luxury yacht, which is available for charter in the Caribbean and Mediterranean. The company continues to enhance its offerings and is also looking for growth in Europe. It is also excited about the introduction of RH Residences, which will offer furnished turnkey homes and condominiums.
Last month, Jefferies analyst Jonathan Matuszewski initiated coverage of RH with a Sell rating and a $320 price target. The analyst stated that while RH has opened 24 “architecturally inspiring locations” with impressive lifts to physical and digital sales over the last decade, he has trouble believing the next two dozen galleries will see returns consistent with those “initial, cherry-picked projects.”
Matuszewski also notes that the Street estimates may not be focusing on potential deleverage from investments and ad spending for brand awareness that “could mount quickly.” (See RH stock analysis on TipRanks)
The Street has a cautiously optimistic outlook on RH. Its Moderate Buy analyst consensus breaks down into 8 Buys, 5 Holds and 1 Sell. With shares rising 77.7% year-to-date, the average analyst price target of $408.83 implies an upside potential of about 8% in the months ahead.
So the better retail stock is…
Lowe’s currently appears to be a better home improvement stock than RH and has a higher upside potential ahead. Moreover, it raised its quarterly dividend by 9% to $0.06 per share following its impressive 2Q results. Lowe’s is a dividend aristocrat and has a dividend yield ratio of 1.56%. In contrast, RH does not pay any dividends.
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment
