Lowe's 3Q profits dropped 30%, but flooring and appliance sales rose

Homeowners still aren't ready to go whole-hog on their bath and kitchen renovations, but they're taking on slightly larger projects than they were earlier this year, according to executives at Lowe's Cos. (LOW), which reported that its third-quarter profit met expectations.

The nation's second-largest hardware chain posted net income of $344 million for the quarter, a drop of 29.5% from a year ago. Earnings per share were 23 cents for the quarter, or 24 cents after factoring out some accounting charges, which met Wall Street's expectations.
Consumers are spending on smaller projects, Lowe's reported, such as installing new flooring and carpet, and replacing appliances: three areas where Lowe's sales improved. Management said Lowe's offset lower sales with cost-cutting, which helped increase its profit margin.

Sales remain soft, with comparable-store sales down 7.5%, driven by a 6.7% drop on the size of the average sale. But management said traffic is holding up and picking up in some regions, like California, that had been battered by the housing crisis before the rest of the U.S.

Sales of flooring, carpeting, and appliances picked up during the quarter, which slowed a decline in transactions of more than $500, said CFO Bob Hull, which went from a drop of 16% in the second quarter from the same time last year to a drop of 10% in the third quarter.

And the number of homeowners who say the value of their homes is declining, CEO Robert Niblock said. Consumers are still waiting for home prices and unemployment rates to stabilize, but they're beginning to take on delayed projects, attracted by special values like a Lowe's promotion offering a special price for installing new carpet throughout a home, he said.

"They may not like the environment, but they certainly believe there's better days ahead," Niblock said. "When values are right, consumers respond."

However, shoppers still want to see both unemployment and housing prices stop deteriorating before they consider larger projects, he said, like remodeling kitchens and baths. Lowe's expects unemployment to peak in the first half of 2010, Niblock said, and housing prices to bottom out in the second half.

Lowe's projects fourth-quarter sales to be flat compared to last year. While the third quarter is usually a strong period for home-improvement projects, as homeowners get ready for Thanksgiving, the fourth quarter leans more towards small purchases, like power cords (for all those Christmas-tree lights) and other seasonal decor items.

While Lowe's management is not expecting much improvement before the second half of next year, appliances should get a shot in the arm from a $300 million federal program that will give states funds to offer rebates on replacing old appliances with energy-efficient models.

COO Larry Stone said the rebates will probably hit just in time for President's Day sales in the first quarter. He did not estimate what effect those rebates would have on Lowe's profits, but said they should spur additional appliance sales. "Anytime you're offering funds for trading in a clunker, you're going to get sales," he said.
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