I'm not going to blow one quarter out of proportion. But the first takeaway was that Lowe's outgrew Home Depot this quarter. It also says that the steps that management has taken to improve operational efficiency are beginning to pay dividends. And as evidenced by the 9.6% growth in same-store sales (or comps), which tracks the performances of stores that have been opened at least one year, there's no denying that Lowe's has found a solution to its merchandising and cost-management deficits. Although I had little doubt that Lowe's would eventually get its house in order, weak merchandising and a feeble cost structure had eroded Lowe's foundation, which led customers to Home Depot instead. That the company has now produced its best comp growth in a decade, I have to credit management It's been an extremely difficult environment, especially given the weak comps that we've seen from the likes of Wal-Mart ( WMT) (1% growth).
Although it may sound like it, I'm not here boasting about my confidence in Lowe's. Well, maybe a little. But it's not hard to like a company that has put together the string of profitability that this company has. Even though Lowe's had struggled with growth and some operational deficits, the company had never showed signs that its cash registers were not ringing. And that gross margins advanced this quarter by 42 basis points also suggests exceptional cost controls, which is not easy to achieve, by the way. So even though the company added to its workforce, while also extending employee work hours, management still figured out ways to boost operating income by 25%, demonstrating strong signs of efficiency. Unlike some recent quarters, there were no noticeable weaknesses this time in Lowe's that Home Depot could exploit.
To be fair, given Home Depot's likewise solid results, I don't believe that this is a situation where Lowe's is stealing market share from Home Depot. Given what I've seen from lumber manufactures such as Weyerhaeuser ( WY) and Louisiana Pacific ( LPX), I more or less believe that the U.S. housing recovery has much more to do with the better-than-expected results.