Hardware Industry: The Home Depot, Lowes, Lumber Liquidators

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has outperformed both the S&P 500 and S&P Retail indices in the past five years. As shown by Figure 1, in the past three years, LOW has increased approximately 162% in value, whereas the S&P 500 and S&P 500 retail index have increased approximately 58% and 84% respectively.

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Figure 2. Lowe’s stock price 2012 to date

Figure 3. Lowe’s quarterly EPS. Red - missed expectations; Green - beat expectations; Blue - met expectations

As shown in Figure 3, Lowe’s has consistently met Wall Street analysts’ expectations/estimates for quarterly earnings per share. In the past thirteen quarters Lowe’s has only failed to meet the quarterly EPS estimates twice, in 2012Q2 and 2015Q1. Lowe’s missed the 2012 second quarter EPS estimate due to a decrease of 10% in second quarter net income. This

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decrease in net income was due to a timing shift (Fiscal 2012 had one less week than previous year) and a onetime charge tied to job cuts. Lowe’s stock price wasn’t affected by this miss. Lowe’s also missed the most recent quarter EPS, analysts expected an EPS of $.74 on a same store sales rise of 6.1%, 2015Q1 same store sales rose only 5.2%. After the missed earnings announcement, Lowe’s shares dropped approximately 5% in pre-market trading. In contrast, Lowe’s beat the 2013Q2 estimates due to an increase of same store sales of 9.6%, analysts expected a same stores sales growth of 5.3%; Lowe’s shares rose approximately 4%.

On August 19, 2011 the Company Board of Directors approved a no expiration $5 billion share repurchase program. As of January 30, 2015, the Company had $2.4 billion remaining available under the program. On March 20, 2015, the Company’s Board of Directors authorized an additional $5 billion under the repurchase program with no expiration. In fiscal 2015, the Company expects to repurchase shares totaling $3.8 billion. Lowe’s shares are up approximately 165% since fiscal year 2012.

In fiscal year 2013 Lowe’s acquired the California based hardware store Orchard Supply Hardware for $205 million. Its assets include 72 stores, though it has also assumed responsibility for payables owed to all of Orchard supplier’s partners. This move by Lowe’s looks to counter competition from Home Depot in the California real estate market. Home Depot has more than twice the number of stores as Lowe’s in California. Lowe’s thinks the company has growth potential only inhibited previously by the high amount of debt. Lowe’s shares shed 1.2% the trading morning after the announcement, though they kept with their upward trend throughout the year.

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Lumber Liquidators (LL)

If you were a contractor with excess materials from a job, what would you do with perfectly good material that you did not need? If you happened to be in Massachusetts in 1993 you probably sold the wood to Tom Sullivan, who would then sell the product from his trucking yard. Over the next three years Tom’s company began to favor hardwood flooring and soon moved from the truck yard to its first store on January 5, 1996. Eight months later the second store opened in Connecticut. In 1999 the headquarters relocated in Colonial Heights, VA and steadily outgrew itself over the next five years and settled in Toano, VA. Lumber Liquidators is now operating stores across forty six states and Canada.

Lumber Liquidators has one of the largest inventories of prefinished and unfinished hardwood flooring in the industry. LL carries solid and engineered hardwood, laminate flooring, bamboo flooring, cork flooring and resilient vinyl flooring, butcher blocks, molding, accessories and tools. (3) LL eliminates the middleman to keep prices down, is environmentally contentious and purchases from suppliers who practice sustainable harvesting, which allows forests to heal and re-grow faster, and everything LL sells (unless specified otherwise) is first-quality, graded to industry specifications, and available in standard flooring lengths. (3)

Over the past few years LL has been focusing on supply chain optimization, enhancing training for a unified vision, repurchasing stock, and growing the corporation. In 2011 LL completed the acquisition of certain assets of Sequoia Floorings. This purchase allowed more direct control of the quality and price of products coming from China. (4)

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In 2012 Lumber Liquidators University opened from a vision from Rob Lynch, the CEO of the company since 2010. All managers attended a one week training program to reinforce a unified long-term vision and set of objectives for the company. (4)

In 2013 the company repurchased $50 million of stock. This repurchase strengthened the value for the stockholders and was a result of confidence in store models and growth potential. (4)

LL expanded in 2014 with a vision to expand and add 250 new jobs in VA over the next three years. A west coast distribution center opened in California thus optimizing supply chain and keeping cost down. Two lawsuits were filed in 2014. LL is accused of selling wood with elevated levels of formaldehyde and of distributing wood from Siberia. (4)

On March 1, 2015 60 Minutes aired a report of laminate flooring with elevated levels of formaldehyde made in China and sold by LL. Before the airing of the show LL stock was at $51.86 per share. On March 2, 2015 LL closed at $38.83, the lowest since 2012. On May 21, 2015, Rob Lynch resigned as CEO. LL with remain focused on growth for the remainder of the fiscal year.

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Key Performance Indicators and Valuation Ratios

Figure 4. Total returns (assuming reinvestment of dividends) of HD, LOW and LL common stock, S&P 500 Index and S&P Retail Index. The graph assumes $100 invested in the company’s common stock and each of the indices

Both HD and LOW have outperformed the S&P indices consistently within the past few years with HD outperforming its peers by a higher margin. HD and LOW have consistently met and surpassed quarterly earnings per share expectations; HD and LOW stock price have increased 155% and 165% respectively since 2012 to date. LL presents a more volatile trend behavior where the first few years lagged the indices and its peers. The beginning