Lowe's outlook disappoints; retailer still lags Home Depot

Reuters

(Adds market share data, CEO comment, real estate market data)

By Dhanya Skariachan

Nov 20 (Reuters) - Lowe's Cos Inc reported slightlylower-than-expected quarterly earnings and gave a disappointing fiscal-yearoutlook, underscoring the No. 2 home improvement retailer's struggle to catch upwith market leader Home Depot.

Wednesday's news came the day after strong results from Home Depot Inc, which increased its forecast for the year for the third time in threequarters as rising housing prices encouraged more people to invest in theirhomes.

Lowe's results also made some analysts wonder if rising interest rates wouldtake some steam out of the recent housing market rebound that has encouragedhomeowners to take up more expensive remodeling projects.

"In addition to missing earnings-per-share estimates, interest rates arerising and housing is slowing, calling into question continued outperformance inthis space in 2014," Janney Capital Markets analyst David Strasser said.

A report from the National Association of Realtors on Wednesday showed salesof existing homes fell 3.2 percent in October. The median price of a previouslyowned home rose 12.8 percent from a year ago.

Lowe's shares were down 5.1 percent at $47.85 on the New York StockExchange, while Home Depot fell 0.5 percent to $80.01.

On a conference call, Lowe's executives said discretionary spending onlarger home projects was still far below pre-recession peaks. They also saidcompetition in the appliance market had eaten into the company's gross margin.

Even though Lowe's issued an outlook below analysts' estimates, ChiefExecutive Officer Robert Niblock said the home improvement industry was poisedfor growth this quarter and for "further acceleration" in the next fiscal year.

In an interview, Niblock said the company had not seen interest rateshurting the recovery in home improvement sales so far.

Lowe's, once a Wall Street darling, is not just a victim of the vagaries inthe housing market. It was slower than Home Depot to cut costs during the mostrecent U.S. recession.

Some analysts also say Home Depot will continue to outperform Lowe's on thesales front for a while, in part because it derives much more revenue from thekey contractor and professional customer group.

These customers account for 35 percent of Home Depot's sales, compared with25 percent at Lowe's. Some analysts say it is hard to close that gap quicklybecause Home Depot has more stores than Lowe's in major metropolitan areas,where many of the professional contractors are based.

FIGHT FOR MARKET SHARE

Sales at Lowe's stores open at least a year rose 6.2 percent in the thirdquarter ended Nov. 1. It was the 18th straight quarter that the company postedweaker same-store sales than Home Depot.

At the end of 2012, Home Depot had 18.7 percent of the U.S. home improvementmarket, while Lowe's had 15.2 percent, data from Euromonitor Internationalshowed. The research firm expects Home Depot to have a 19.2 percent share andLowe's to have 15.6 percent by the end of this year.

In recent years, Home Depot has benefited from efforts to improve customerservice and win shoppers with more compelling prices than its rivals. It hastailored its marketing to local areas, centralized distribution centers andshifted more workers to jobs where they serve shoppers directly.

After losing share to Home Depot for several quarters, Lowe's laid out aturnaround plan, offering everyday low prices and products targeted to specificgeographic markets.

Lowe's also made its stores more appealing with improved signs, televisiondisplays that stream videos on how-to-do projects, and lower racks to make itemseasier to reach.

For the fiscal year ending Jan. 31, Lowe's raised its earnings forecast toabout $2.15 a share from $2.10. However, the new outlook fell short of theanalysts' average estimate of $2.19, according to Thomson Reuters I/B/E/S.

The retailer also increased its outlook for sales growth for the year toabout 6 percent from 5 percent.

Net earnings in the third quarter rose to $499 million, or 47 cents a share,from $396 million, or 35 cents a share, a year earlier. Analysts were expecting48 cents a share.

Sales increased 7.3 percent to $12.96 billion, topping the analysts' averageestimate of $12.72 billion. (Reporting by Dhanya Skariachan; Editing by Lisa Von Ahn)

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