An Example Of How Lowe’s Is Way Behind Home Depot. And They Know It! (NYSE:LOW)

In this article, I would like to share with you a real world example of why Lowe’s (LOW) has been historically awarded lower multiples than its bitter rival Home Depot (HD) and how fixing the problem will potentially lead to a re-rating of the stock.

Throughout this great land of ours, for quite some time, the home improvement market has been dominated by the duopoly of Lowe’s and Home Depot.

Source: | Unprecedented visibility into consumer foot-traffic

Think of this duopoly as Coke (KO) vs. Pepsi (PEP), Mcdonald’s (MCD) vs. Burger King (QSR) or Walmart (WMT) vs. Amazon (AMZN).

In each of these three duopolies, let’s be totally honest, deep down we all know who has the better product… Coke, Mcdonald’s & Amazon. And why do we all know this instinctively? The answer is simple, a better customer experience!

Coke, in my opinion, just flat out tastes better, McDonald’s I have found are far cleaner and generally offer faster service than Burger King and with Amazon, I could ride out 4 more successive pandemics without leaving my couch let alone having to experience a live-action “people of Walmart” meme (Google it if you want to laugh).

Now throughout my life, I have drifted back and forth with my patronage of Home Depot and Lowe’s, so when my dishwasher kicked the bucket a few weeks ago, I was thrust upon a mission for the lowest price and fastest service between the two companies.

With the coronavirus raging at such a level that even our beloved mid-Michigan icon, Tom Izzo could not defend himself against its infectious wrath, I decided to do a 21st century experiment to buy and set up installation of my new appliance directly from my living room.

First up on my list was Lowe’s. I discovered the app was functional, easy to use and I found a dishwasher I wanted to buy very quickly. But setting up installation was not an option on the app so I needed to call the store. I rang my local store, and it rang, and rang and rang… It literally took 45 minutes to reach an associate only to find out that installation services were only sold in-store via old school paper contracts. When I asked why I could not do this online, he simply said, because that’s how we do it.

After promptly hanging up and muttering a few choice words, I embarked on my quest with Home Depot. Upon opening the app, I found the exact same dishwasher albeit for $10 more just as easily but noticed a chatbot in the window.

As this was an experiment along with a purchase I decided to give it a try. I typed in installation services in the window and the chatbot asked if an associate could call me, I said yes, and received a call instantly from Home Depot installation services. I ended up paying and set up installation of my new dishwasher over the phone via chatbot in under 5 minutes!

Now, I know from previous experience with Lowe’s that I paid more than $70 more at Home Depot than I would have at Lowe’s had I gone through the hassle of driving to the store and putting on my coronavirus proof hazmat suit to buy their installation service. But I truly do not care one bit about paying more! Why? My customer experience.

The simple fact is that Home Depot beat Lowe’s like a drum from the band at Spartan Stadium on this purchase. As a long time Lowe’s shareholder, obviously, I was not pleased at all and frankly over the weekend I toyed with the idea of selling all of my shares Monday morning. But as my anger subsided and I did my research on Home Depot, it is clear that the valuation premium given to Home Depot is exactly for this reason.

So can Lowe’s catch up?

Yes, they can!

None of what I experienced at Home Depot is magical witchcraft or a case of ingrained product superiority over their rivals as Coke has over Pepsi, it simply comes down to IT infrastructure and customer service.

Luckily, for investors, Lowe’s knows it has a serious problem. New CEO Marvin Ellison was firmly on the warpath to correct this in the beginning of 2020, hoping to tear down and rebuild basically all of Lowe’s antiquated IT platform before the pandemic struck. Below is a quote from December 2019:

“Our e-commerce business is under repair and we are addressing legacy issues with the platform. Our first step in improving our online business is creating stability. To that end, we’re working diligently to improve the foundation of by re-platforming the entire site to Google Cloud from a decade-old platform. This work is critical to improving the stability of our ecosystem and increase our agility. We expect to have the entire site on the cloud in the first half of 2020. With a modernized, stable architecture in place, we have the ability to provide our customers with basic online functionality and address legacy ecommerce capability gaps”

The picture is improving with Lowe’s as they have accelerated plans to spend $500 million per year to upgrade their online experience and were thankfully able to take advantage of curbside pickup and in app orders during the pandemic that they simply could not do in 2018-19, however, clearly much work is left to do but with the Lowe’s website now transitioned to the Google Cloud, Mr. Ellison is squarely focused on closing the gap.

One of my favorite quotes from him I found during my research was “If you are not on the cutting edge of technology and online experience in retail, you end up on the cutting room floor.”

I have come away from my research and frankly terrible experience with the knowledge that the man with the checkbook is on the case and on a mission to catch up and surpass Home Depot in precisely the kind of experience I had.

If Lowe’s does in fact catch up to Home Depot, the stock looks to have some serious upside!

ChartData by YCharts

Lowe’s stock has been a serial underperformer to Home Depot for years. Currently, Home Depot holds a roughly 33% higher valuation than Lowe’s!

However, Lowe’s since Mr. Ellison’s hiring has been closing the gap in operating metrics, setting the stock up well for a pretty massive re-rating of its valuation.

ChartData by YCharts

In my view, Lowe’s has focused for decades on beating Home Depot on price but not on customer experience. This strategy was clearly flawed as I imagine a large portion of the American public would not mind paying a few extra bucks to avoid hassle and frustration as I did.

If the trajectory and strategy trumpeted by the new CEO Mr. Ellison comes to fruition, I am expecting Lowe’s and Home Depot to once and for all be valued similarly.

If we take the current valuation difference and rate Lowe’s to the 23.85 P/E ratio Home Depot enjoys, using a forward EPS of $8.57, we end up with a value of $204.39 for Lowe’s, a healthy premium and a solid return for any investor.

Even if this transformation takes time, as it surely will, Lowe’s may finally overperform Home Depot while they reel them in and close the gap.

Some duopoly winners are likely to stay etched in granite permanently. For instance, Coke will always, in my opinion, until the end of time, taste better than Pepsi. But nothing is written in stone between Lowe’s and Home Depot and I hope to capitalize on and be rewarded if Lowe’s is eventually able to finally close the customer experience gap with Home Depot.

So Mr. Ellison, keep up the fight and keep that checkbook open to your IT vendors, because my fridge is starting to make a weird noise.

Thank you for reading and stay safe!

Disclosure: I am/we are long LOW, KO, AMZN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: “This is not a solicitation to buy or sell a specific security nor is it to be construed as investment advice, please contact your licensed financial and tax advisor for advice to your specific situation”

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