Lowe's Fourth-Quarter Earnings Jump 27%, Fueled By Remodelers

Lowe's Cos. (LOW) reported fourth-quarter earnings that were better than expected, and sales figures for kitchen cabinets and countertops hint that the home-improvement market has hit bottom and begun to recover.The nation's second-largest hardware chain posted net earnings of $205 million for the quarter that ended Jan. 29, up 26.5% from a year earlier. Earnings of 14 cents per share beat analysts' expectations of 12 cents. Lowe's full-year earnings dropped 18.8% from fiscal 2008, to $1.78 billion, or $1.21 per share. Comparable-store sales (sales at stores open for a year or more) dropped 1.6% for the quarter and 6.7% for the year.

The results for the fourth quarter show the market is going through a "bottoming-out process," said Lowe's CEO Robert Niblock. Customers appear to be taking on more remodeling projects, but they're still being cautious with their spending. He reported that store traffic growth remains dominated by individual homeowners, while commercial construction is still depressed due to the housing crunch.

Homeowners are beginning to spend on slightly larger projects, Lowe's executives said, but they still require some promotional incentives. Niblock said appliance sales should get a boost in the first quarter from a government incentive program offering rebates to replace old appliances with energy-efficient ones. Also, Lowe's has gotten good responses from promotions offering special rates for installing new flooring and kitchen cabinets.

"We're seeing more people doing projects than they did in the past," said Niblock. "We're seeing numbers going in the right direction, part of that bottoming process. . . . More of them will hopefully come off the fence."

Future Growth in Urban and Overseas Markets

The fourth quarter showed the best comparable sales in three-and-a-half years, and comparable sales of special-order and installation items were up, which shows a willingness among households to take on larger and more discretionary projects, Niblock said. Lowe's President Larry Stone noted that comparable sales of appliances and kitchen cabinets were up by double-digit percentages during the quarter. Flooring, paint and millwork had single-digit comparable-sales increases.

Lowe's issued modest guidance for 2010, saying it plans to open only 40 to 45 new stores and expand square footage 2%, in keeping with its strategy of opening smaller stores in underserved urban markets and focusing on new growth abroad. Niblock said the Lowe's stores opened in Mexico in February are getting "tremendous response," and the systems set up to open them will be used to continue the chain's international expansion.

Management forecast earnings between 27 cents and 29 cents for the first quarter and $1.30 to $1.42 for the year. Niblock said the company had tempered its first-quarter outlook because of the rough weather in most of the country and continued uncertainty among consumers about unemployment and the weak housing market. Lowe's will benefit during that period from an easy comparison to the first quarter of 2009's weak numbers, but it expects to see stronger growth as the year goes on. The outlook assumes that the second half of 2010 will see economic conditions stabilize, which will support housing market demand and help the company's sales, he said.

Sales Should Turn Around in Second-Half 2010

Lowe's management noted that transaction volume has been growing during the recession, which should help the company capture market share as spending increases during the recovery. Comparable transactions rose 0.5% during the last quarter, offset by a 2% drop in transaction size. For the year, customer traffic rose 3.7%, offset by drop of 1.8% in the average ticket to $59.98, said Stone.

Lowe's executives also expect to turn around their sales and operating margins in the second half of 2010 by a modest amount. Though they expect to see comparable sales flat to down 2% in the first quarter, Lowe's forecast calls for comparables to turn positive and end with gains of between 1% and 3% for the full year. Operating margins -- earnings as a percentage of sales -- are also predicted to grow, after dropping by 0.9 to 1 percentage point in the first quarter, to close the year up 0.4 to 0.5 percentage points.

"We feel we're being appropriately conservative in our outlook, given the uncertainties," said Niblock. But he added: "We think the worst of it is behind us. . . . The American consumers feel a lot better about their outlook for the future than they did a year ago."
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