Both stocks are falling today as macro pressures from the Federal Reserve and mortgage data weigh on market sentiment, but at the same time each company is trying to position itself as the pre-eminent player in retail home improvement.
As the competition heats up between the two, investors need to evaluate which is might be able to help patch up their portfolios after a rough October.
Share of Sears
One of the largest developments that both companies will need to address is the bankruptcy of what was once the nation's largest retailer in Sears.
Investors may be surprised to hear that even just before its bankruptcy in October, Sears still commanded billions in revenue driven in large part by its tools and appliances that both Home Depot and Lowe's also supply.
Now both Home Depot and Lowe's will look to capture market share that Sears leaves behind.
Credit Suisse notes that Home Depot is better positioned, with 81% of Sears stores being within a 5-mile radius of a Home Depot. Lowe's still maintains a significant overlap, with 71% of stores falling within the same geographical range.
Additionally, in terms of immediate store closures anticipated by Sears, Home Depot will maintain an edge reflected in the chart below.
To be sure, there might be some pain in the short term especially in a season saturated with sales.
"In the short term, you will get liquidation that will add a little pain for the retail sector," Stacey Widlitz, president at SW Retail Advisors told Real Money upon Sears' bankruptcy announcement. "This isn't great timing for retail as we head into the holidays."
She explained that competitors will feel a pinch on profits in the short term as Sears' liquidation prices undercut their products.
The benefit from Sears may also be priced into both stocks, as both have benefited from Sears' market share-donor status for years.
In fact, each company may be sorry to see the incremental donor go.
As they do say farewell to Sears, Lowe's and Home Depot have begun haggling over exclusive partnerships with top tool and hardware companies.
Most notable of recent developments is Lowe's freshly-inked exclusive deal with former Sears-standby Craftsman and Stanley Black and Decker's (SWK) agreement to make Home Depot the sole supplier of STANLEY branded tools in 2019.
"Market's initial view was HD/SWK deal a plus for HD but negative for LOW," Morgan Stanley analyst Simeon Gutman wrote in an assessment of the exclusive action. "While a slight boost for HD, given LOW recently won the higher profile & likely larger Craftsman brand, we think HD is playing "catch up" and LOW can manage the loss of STANLEY."
Gutman explained that, in his estimation, the deal for SWK's more recognizable Craftsman brand will mitigate the loss of the STANLEY franchise and puts Lowe's ahead of Home Depot in terms of exclusive deals.
One aspect that sets Home Depot apart is the fact that the exclusivity for STANLEY products will also extend to online sales, allowing for protection from Amazon (AMZN) as well.
Nonetheless, Gutman was firm in his more positive outlook for Lowe's and noted that Lowe's will still maintain a large partnership with SWK overall.
The Mooresville, North Carolina-based retailer is currently Stanley Black & Decker's largest customer, accounting for 12% of the toolmaker's sales, including its Craftsman brand. The company's concentration of sales does not reach double digits for any other partner.
In order to move their products, the companies' store locations will be key given the comparatively minor interference that online retailers have run into Lowe's and Home Depot's sector of retail.
Possibly of concern for investors betting on Lowe's, the company has reported that it will close a number of underperforming stores.
"While decisions that impact our associates are never easy, the store closures are a necessary step in our strategic reassessment as we focus on building a stronger business," Marvin R. Ellison, Lowe's president and CEO explained.
Ellison, who has helmed Lowe's since July, noted that 20 domestic and 31 Canadian store closures will be completed by February 2019.
The move marks one of the first reorganizing moves of Ellison's tenure. It is worth noting that Ellison was a veteran of Home Depot for over 12 years before making a disappointing four-year run atop J,C. Penney (JCP) .
His move to close underperforming stores is yet another swift move from Ellison to catch up to his previous employer Home Depot, coming just months after his shuttering of Orchard Supply Hardware and streamlining store inventory.
"We are significantly behind in our supply chain strategy, our in-store technology is dated, overall execution is impaired by complexity, we have a large number of out-of-stocks in our stores that must be addressed, and we need to increase the rigor with which we evaluate capital investment," Ellison told analysts on his first earnings call in August.
It would appear that he is delivering on his stated goals at the moment, which the market has been picking up on.
That said, he will need to continue to play catch up to Home Depot given the disadvantage he inherited.
According to FactSet, confidence among those following home improvement stocks remains in both sides of the current duopoly.
The average assessment of the 34 analysts following Home Depot stands reflects an "Overweight" rating and a $210.34 price target, while Lowe's analysts have likewise slated an "Overweight" rating and an $117.50 price target.
"We continue to recommend both stocks given our positive view on the home improvement segment of the housing market," RBC Capital Markets analyst Scot Ciccarelli said, summing up market opinion.
Still, he was partisan in his pick, stating his larger comfortability with Home Depot.
"[We] would prefer HD to LOW if we could only choose one given the former's more consistent track record," Ciccarelli explained. "We do believe, however, that some investors may prefer LOW, given the potential for operational improvements."
Home Depot will hope to convince investors of its lead on Tuesday morning when it releases its third-quarter earnings results, while Lowe's will have to wait until November 20 to make its case. Investors will need to take note of these many points of competition as results flow out over the next week.