To the extent management can post higher margins to demonstrate the sort of operational leverage the Street craves, the stock should respond well. By "operational leverage" I'm referring to, say, a double-digit basis point a jump in gross margin. Only then will investors buy into management's initiatives to improve operational efficiency. Investors want to see the dividends -- but Lowe's has already proven this.
Don't forget, Lowe's is coming off a solid November quarter that produced more than 7% revenue growth. This beat the consensus estimate handily. Even more impressive was that same-store sales advanced 6.2% year over year. With the company generating (on average) over $7 million in revenue per store, management made every bit of that traffic count.
What this means is management knows how to squeeze out strong profitability from each store location. So although it's still premature to say Lowe's has leapfrogged Home Depot in terms of size and operational efficiency, the Street should credit management for its work to close the gap. But don't assume the company is content with second place.
All told, I don't see any noticeable weaknesses in the company's current status. There is always room for better merchandising situation and improved cost structure. But there isn't a retailer that is ever satisfied with these areas. In that regard, given Lowe's strong comps of late, Michael Jones, the company's new chief merchandising officer has pushed the right buttons.
Again, this is not to say Lowe's should suddenly take its foot off the gas pedal. We should agree, however, that this race with Home Depot is much closer than previously thought.
At this point, Lowe's is the better investment. With the Orchard deal in hand, management seems more willing to take the sort of risks necessary to return long-term value to shareholders. This supports a valuation of $55 to $60 in the next six to 12 months.
At the time of publication, the author held no position in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.