After Lowe’s (LOW) and Home Depot (HD) reported their Q1 results, there was no shortage of analysts who came out stating Lowe’s was a better value with more upside than Home Depot. They argued that the softness that the company experienced in Q1 was entirely weather-related, and Lowe’s has way more runway to capture market share. From the investments the company continues to make in its logistics and supply chain to the growth with their Pro Customer base, the Lowe’s bulls saw the dominance by Home Depot as coming quickly to a close.

However, putting Lowe’s value, efficiency, and growth into context, it becomes clear that unless Lowe’s starts growing its revenues at a double-digit pace, they will continue to be second choices stock.

The Lowe’s Value Trap Illusion

If an investor quickly looked at a comparison of some basic valuation and profitability measurements for Lowe’s vs. Home Depot, they might be inclined to think Lowe’s is a bit of value. They trade at a lower multiple on P/E, Price/Sales, Price to Cash Flow, Price to Earnings Growth, even Price to Forecasted earnings. Further, Lowe’s delivers a gross margin that’s nearly identical to Home Depot’s.

Going a bit deeper, the company offers $5.42 Tangible book per share, or effectively 5.5% of the current share price. Cash flow is $6.48 per share or approximately 6.5% of the current share price compared to Home Depot who offers $3.02 per share or 1.5% of the current share price. To most value investors, the protection that Lowe’s seems to provide for a growing retailer would be extremely appealing. Yet, looking into the numbers a bit closer, we find that there are significant reasons why Lowe’s shares are priced as they are, namely productivity and growth.

Going a bit deeper, the company offers $5.42 Tangible book per share, or effectively 5.5% of the current share price. Cash flow is $6.48 per share or approximately 6.5% of the current share price compared to Home Depot who offers $3.02 per share or 1.5% of the current share price. To most value investors, the protection that Lowe’s seems to provide for a growing retailer would be extremely appealing. Yet, looking into the numbers a bit closer, we find that there are significant reasons why Lowe’s shares are priced as they are, namely productivity and growth.

Home Depot’s Value Lies In Productivity

What Lowe’s bulls often miss is not the room that Lowe’s has to grow, but the way in which it grows. Consider that on average Home Depot puts out $42M per store, while Lowe’s sits at $30M per store. That measurement effectively says that for every store Home Depot runs they get nearly 1/3rd better revenues than an average Lowe’s store. This is further backed up by the fact that not only does Home Depot put out 1/3rd better revenues per square foot than Lowe’s, but also that if you go back to 2013, you realize the company still had higher revenues per store than Lowe’s does today. This may have something to do with why Home Depot boasts a current Return on Assets of 19.70 vs. Lowe’s at 10.08.

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Looking back at the Net Margin, part of the reason the companies differ substantially from Gross Margin to Net Margin is the SMG&A costs. As a percentage of revenues Home Depot runs around 17%-18%, while Lowe’s runs 22%+. Again, the evidence points to Home Depot being the more efficient company in how they grow their sales.

Lowe’s Falls Behind In The Online World

Although Lowe’s doesn’t see their business being eroded by the likes of Amazon (AMZN), they should be worried about Home Depot’s role in the online marketplace. Lowe’s boasted some pretty solid numbers in online sales growth, with TTM at 30.8%, which tops Home Depot’s increase of 21.8%. In fact, Lowe’s has beaten Home Depot every year since 2014. But let’s put this into some context.

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Currently, Home Depot’s online sales represent 7.3% of their total sales. Lowe’s is just over half of that at 4.3%. The growth numbers that Lowe’s put up every year haven’t been enough to eclipse Home Depot. On the whole, they’ve barely kept up. What makes this extremely critical is both retailers have begun to focus heavily on their Pro Customers, with Lowe’s having a dedicated website solely for those customers. However, despite all their efforts to date, they still haven’t matched Home Depot. The large portion of online sales is, in part, why at the moment Home Depot generates more revenue per store than Lowe’s.

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Corporate Guidance Comparison

Look at the side-by-side of the EPS vs. the consensus and see if you can figure out which is Home Depot and which is Lowes. If you guessed that the one who consistently beats the earnings estimates was Home Depot, you’re right.

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Over the years Lowe’s consistently overpromises and underdelivers. Recently, this has led to Marvin Ellison being appointed the CEO of Lowe’s. You might remember him from JC Penny where he attempted to turn around a company that was destined for bankruptcy. Ellison isn’t wasting much time to get the company on the right side of the market. With all the analysis provided, Ellison is the X-factor for Lowes. If he can really turn the company, then on a relative basis, Lowes stands poised to make some solid gains on Home Depot.

Final Thoughts

Any analysis that digs past the cursory details of Lowe’s value metrics would show that the company performs exceptionally poorly compared to Home Depot, although by no means is Lowe’s a bad company. However, the stock price relative to Home Depot is entirely justified given what Home Depot delivers, even in its Q2 results. Lowe’s can continue to exist as it currently is. Yet, without any fundamental shift in strategy and investment, they’ll continue to be the little sibling to Home Depot.