Saturday, July 06, 2013

Lowe's Chops Down Orchard

Orchard Supply Hardware (OSHWQ) is bankrupt.  Lowe's (LOW) is buying most of OSH's assets in a bankruptcy auction for $205M.  The risk of this transaction breaking up is small unless Home Depot (HD) jumps in with a bid.  Lowe's intent is to increase its California presence and Home Depot is already strong in that state.  I'd like to know how Lowe's and Home Depot stack up right now.

Market cap:  $45.88B
P/E:  24.49
Profit Margin:  3.91%
ROE:  13.86%

Market cap:  $114.37B
P/E:  24.85
Profit Margin:  6.21%
ROE:  27.5%

Investors are paying almost the same P/E for these two big home improvement competitors even though Home Depot is clearly more profitable and making better use of its invested capital.  Home Depot has about 50% more market share than Lowe's (judging from their gross revenues), so Lowe's will need all the Orchard retail space it can get.  Lowe's same-store sales have been all over the map recently, and Lowe's seems to trail Home Depot in both cost-cutting flexibility and penetration of the professional builders' sector.  Lowe's margins will suffer further in the short term after it converts Orchard's stores to its own layout and absorbs the accounts payable that it agreed to take in the buyout deal.

Full disclosure:  No positions in any company mentioned at this time.