LOW/HD: Same Biz, Polar Approaches
A quick roll in sales/inventories alongside a margin hit at a time when LOW faces one of its easies compares shows some interesting divergences between LOW/HD. But the real question is whether you want to be here at all. From this point – the call on housing matters.
We’re seeing such a polar opposite result from LOW vs. HD as it relates to trading off between the P&L and the balance sheet. The chart below says it all. It overlays the trajectory for LOW/HD on those metrics for each of the past 4 reported quarters. The Y-Axis measures the sales/inventory spread (higher is better), while the X Axis measures the yy change in margin. HD has had positive margins, with an improving sales/inventory spread, while LOW’s margins AND inventory spread have both been down in 4 of the past 5 quarters. More troubling for LOW is that its trajectory on this chart just swung back down to the lower left quadrant – even though it faced the easiest compare of the year.
While it’s tempting to look at the puts and takes on each of these two in more detail, the bigger question should really be whether you want exposure to either. We have four quarters of improvement on the margin from both – off of a cyclical low. Now, you need to believe in a housing recovery to be comfortable in these names. If you want to make that call, then be my guest. You might be lonely for a while.