Bad weather, lousy economy hammer Lowe's Q2 results

The housing crisis is still punishing Lowe's (LOW). The hardware store chain today posted lower than expected earnings, cut back its forecast for the rest of the year and put some expansion plans on hold to deal with skittish consumers who are still biding their time before embarking on home improvements.

The company reported net income of $759 million for the quarter ending July 31, a 19.1 percent drop from the same time a year ago; this translated into an earnings per share of 51 cents. Sales dropped 4.6 percent to $13.8 billion, and fell by an average of 9.5 percent in stores open at least a year.
Lowe's management blamed the bad quarter on shaky consumer confidence, bad weather, and a harsh comparison to last year's quarter, when consumers were prodded into the store by a fresh influx of federal tax rebate checks. But CEO Robert A. Niblock said in a statement that there are signs of a bottoming out in housing and the larger economy, so the company expects D.I.Y.ers to begin trickling back into stores.

Last September, Lowe's had said it would cut store growth to 80 openings annually through 2013, but the last quarter's weak results have led management to announce that it has cut back on its store expansion plans for this year and next.

Lowe's still intends to open 62 to 66 stores this year, but now is looking at 35 to 45 new stores next year. Some store openings have been canceled, according to the company's statement.

This is bad news for the No. 2 home-improvement chain in its two-way battle to unseat Home Depot. Before the housing crisis hit, Lowe's had taken advantage of Home Depot's missteps and the demise of the neighborhood hardware store to pick up market share. Tomorrow, when Home Depot reports its own results for the second quarter, it will become clear if this is a Lowe's problem, or if it's endemic to this market sector.

Analysts expect that Home Depot will also report slow sales, but they are mildly optimistic and a few have even issued "buy" recommendations, assuming that the worst of the housing debacle is over and the home improvement chains are merely scraping bottom now.

Still, Lowe's management has cut back its outlook for the rest of the fiscal year, ending on January 29. It now expects sales to drop two to five percent in this quarter and earnings per share of 21 cents to 25 cents; that's below analysts' projections of 27 cents a share and a 1 percent sales drop. For the year, sales are expected to drop about three percent, and same-store sales are expected to drop seven to nine percent. Meanwhile, earnings per share are estimated to fall by $1.13 to $1.21, as compared to the $1.49 per share that Lowe's had last year.

Lowe's management is counting on D.I.Y.ers to perk up its sales for the rest of the year. During a conference call with analysts, Niblock said homeowners tackling small projects such as paint, yardwork, and small repairs provided the bright spots for the company this quarter.

Niblock said the company's research found 40 percent of consumers are postponing major home improvements, waiting for the economy to improve. That is borne out by the weak results the company saw in areas such as kitchen cabinets and countertops.

The key indicator for an upturn would be a rise in home prices, said Niblock. But housing prices don't look to bottom out until first half of next year, he added, so Lowe's would expect sales to move from negative territory to flat in the first half of next year and eventually climb to positive numbers in the second half.

Homeowners who have postponed those big projects will warm up, he said, but "they want to see 'How low is the value of my home going to go?' before they go spend on it."
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