Time for Lowe's to Improve

NEW YORK ( TheStreet) -- Unlike the battles in overcrowded retail segments such as groceries and apparel, the space among the home improvement retailers is occupied by only two giants: Home Depot ( HD) and Lowe's ( LOW).

While this duopoly makes for an interesting rivalry, the debate regarding which of the two is the best is no longer as compelling -- It's clearly Home Depot. With each passing quarter this domestic battle looks more and more one-sided.

However, this was not always the case. I do believe Lowe's has the management in place to fix its merchandising and cost management deficits. But for the stock to work in the long term, the company must adhere to its own slogan and "never stop improving."

It's hard to look at the relative performance of both companies and not marvel at the distinct operational metrics. In the most recent quarter, Lowe's posted both earnings and revenue that missed Street estimates, while the company blamed the softer sales on the weather.

The company posted revenue of $13.1 billion, which -- if being generous -- was flat year over year to slightly down (less than 1%). It was still a miss, nonetheless. Analysts were looking for revenue of $13.45 billion. Same-store sales, or comps, which is the metric that tracks stores that have been open at least one year, declined by 70 basis points.

Given the tough macro climate that has affected other retailers including Wal-Mart ( WMT), which posted 1.4% drop in U.S. comps, Lowe's struggles with same-store sales was not much of a surprise. But what does it say that Home Depot posted comp growth of 4.3%?

It says a lot of things. First and foremost, it says the adverse weather had little impact on Home Depot's store traffic, which helped the company post revenue growth of 7%. I'm not trying to pick on Lowe's here, but this contrast in performance has spanned more than just this quarter and several weather changes -- it's been at least one year.

I would have much preferred Lowe's offer no explanation at all for its shortcomings than to have blamed the weather.

What's also troubling here is that it doesn't appear as if Lowe's is participating much in what many experts are considering moderate-to-better housing recovery.

Along similar lines, the post-Hurricane Sandy boom benefited not just Home Depot but also lumber manufacturers Weyerhaeuser ( WY) and Louisiana Pacific ( LPX) with sustaining momentum. For Lowe's, however, that doesn't appear to have been the case.

Where Lowe's deserve credit is on the profit side. The company posted earnings excluding items of 49 cents per share, which is an 11% year-over-year improvement. Despite the miss on revenue, it was nonetheless encouraging Lowe's was able to advance both gross margin and operating margin by 10 basis points and 25 basis points, respectively -- enough to beat estimates.

All of that said, I don't believe it's time for investors take Lowe's to the proverbial woodshed -- at least not yet. I still like the company's management and I do see opportunities where Lowe's can turn things around.

For instance, it's been no secret that merchandising strategies have impeded the Lowe's progress, adding to Home Depot's advantage.

To that end, earlier this year Lowe's added Michael Jones as chief merchandising officer. With better attention to detail, which should drive in-store traffic and raise customer satisfaction, Lowe's should be able to narrow the gap. But it's not going to happen overnight.

Besides, this is just one part of the many problems the company must repair. Management still has deficits with staffing and operational efficiencies to fix. As bad as things may appear for Lowe's, investors should thank their lucky stars Lowe's is not as bad as JC Penney ( JCP).

It's not a glowing endorsement. But I do want to keep my Lowe's analysis in the proper context. Despite these struggles, I still believe this stock should be bought and that Lowe's will overcome its challenges.

It's just a matter of time. But it's just going to require considerably more patience than investors may be willing to spend.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Richard Saintvilus is a private investor with an information technology and engineering background and the founder and producer of the investor Web site Saint's Sense. He has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.