Why Lowe's Outperformed Home Depot: Strategic Acquisitions and Earnings Power as Catalysts for Retail Growth

In the high-stakes arena of home improvement retail, two titans—Lowe's and Home Depot—have long vied for dominance. Yet, in the second quarter of 2025, Lowe's emerged as the clear winner, outpacing its rival with a 5.6% increase in adjusted earnings per share (EPS) and a revised full-year sales outlook that now exceeds $85 billion. This performance underscores a strategic pivot toward disciplined mergers and acquisitions (M&A), operational resilience, and a laser focus on the professional (Pro) customer segment. While Home Depot's results were modestly positive, its reliance on large-scale integrations and margin pressures highlight the challenges of scaling in a fragmented market.

Strategic Acquisitions: Precision vs. Scale

Lowe's recent acquisitions of Artisan Design Group (ADG) and Foundation Building Materials (FBM) exemplify a surgical approach to M&A. The $1.325 billion ADG acquisition, completed in June 2025, immediately bolstered Lowe's position in the $50 billion interior finishes market, adding $1.8 billion in annual revenue and high-margin cabinetry, flooring, and countertop offerings. This move was followed by the $8.8 billion FBM acquisition, which targets the $250 billion interior building products sector. FBM's 370 locations and 40,000 Pro customers provide Lowe's with a critical mass in drywall, metal framing, and ceiling systems—categories where Home Depot has historically held an edge.

By contrast, Home Depot's $18.25 billion SRS Distribution acquisition, while transformative, has come with integration costs that temporarily compressed margins. SRS's $10 billion in annual revenue and 760 branches have expanded Home Depot's Pro logistics network, but the company's operating margin dipped to 13.49% in fiscal 2025, down from 14.21% the prior year. The acquisition's scale, while impressive, has required significant capital reallocation, including $17.64 billion in cash outflows, which has strained free cash flow.

Earnings Resilience: A Tale of Two Margins

Lowe's Q2 2025 results revealed a gross margin of 33.81%, up from 33.47% in 2024, while its operating margin hit 14.48%, a 14-basis-point improvement. This resilience stems from a combination of cost discipline and strategic pricing power. The company's focus on Pro customers—whose spending is less sensitive to economic cycles—has insulated it from DIY segment volatility. For instance, Pro and online sales grew by mid-single digits in Q1 2025, even as DIY sales dipped due to weather-related headwinds.

Home Depot, meanwhile, faces margin compression from its SRS integration. Its gross margin of 33.42% in fiscal 2025 was flat compared to the prior year, while operating margin fell to 13.49%. The company's full-year guidance includes a 3% EPS decline, reflecting the drag from integration costs and higher interest expenses. While Home Depot's Pro segment now accounts for 50% of revenue, its reliance on large-scale acquisitions has come at the cost of short-term profitability.

Operational Execution: Cash Flow and Capital Allocation

Lowe's free cash flow generation in FY 2025 reached $7.7 billion, up 24.64% year-over-year, enabling a $4.05 billion share repurchase program and $645 million in dividend payouts. This disciplined capital allocation has allowed the company to reduce leverage to a manageable 3.04x debt-to-EBITDA ratio, even as it funds the FBM acquisition. The company's ability to balance growth with financial prudence is a key differentiator.

Home Depot's cash flow, while robust at $16.32 billion in FY 2025, has been redirected toward SRS integration and capital expenditures. Its net debt-to-EBITDA ratio of 2.34x remains healthy, but the company's $8.93 billion in dividend payouts and $649 million in share repurchases pale in comparison to Lowe's aggressive returns to shareholders.

Long-Term Value Creation: Pro-Centric Ecosystems

Both companies recognize the Pro segment as a growth engine, but their approaches diverge. Lowe's Total Home Strategy, anchored by ADG and FBM, aims to create a vertically integrated ecosystem for professional contractors, offering everything from cabinetry to drywall. This vertical integration not only enhances cross-selling but also locks in recurring revenue streams. The company's Pro Xtra Loyalty Program and AI-driven e-commerce tools further deepen customer relationships.

Home Depot's Pro strategy, while formidable, remains more transactional. Its SRS acquisition has expanded logistics capabilities, but the company's reliance on third-party vendors for certain Pro products limits its ability to capture margin. Additionally, Home Depot's pending GMS acquisition, while complementary to SRS, lacks the strategic coherence of Lowe's dual acquisition approach.

Investment Implications

For investors, Lowe's disciplined M&A strategy and earnings resilience present a compelling case. The company's ability to execute large-scale acquisitions without sacrificing margin integrity—while simultaneously returning capital to shareholders—positions it as a long-term outperformer. Home Depot's scale and brand strength remain advantages, but its current trajectory suggests a trade-off between growth and profitability.

In conclusion, Lowe's has outmaneuvered Home Depot by prioritizing precision over scale, leveraging high-margin Pro acquisitions, and maintaining operational discipline. While Home Depot's SRS integration will eventually pay dividends, the immediate returns from Lowe's strategic moves are more tangible. For those seeking a retail stock with both growth and earnings power, Lowe's offers a more compelling narrative.