Lowe's Builds A Case For Optimism

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Lowe's Companies (LOW) is still struggling to sell more home improvement products as the housing market slows. But the Mooresville [N.C.] retailer said Feb. 23 that it's already seen the worst and expects sales to recover later this year.



So far it's been bleak. Lowe's total sales during the 13-week period ended February 2 dropped 3.7% year over year to $10.4 billion, and its sales at stores open more than a year sank 5.3%. "Sales continued to be pressured by a slowing housing market, tough comparisons to last year's hurricane recovery and rebuilding efforts and significant deflation in lumber and plywood prices," CEO Robert A. Niblock said in a press release Feb. 23.



But in spite of the difficult conditions, Lowe's is planning to push ahead with 150 to 160 new store openings in 2007, around the same number as in 2006. During the next quarter alone, the company says it will increase its total sales by 5% to 6% as sales at stores open more than a year fall by a slightly less awful 2% to 4%. And then Lowe's expects business to pick up later in the year, with total sales rising by 10% during the twelve months ended Feb. 2008 and sales at stores open more than a year staying flat or inching up by 2%. "We are encouraged by indications that our sales trends have bottomed," Niblock said.



So were investors. Lowe's stock gained 3.8% to $34.91 per share in early trading on the New York Stock Exchange.



Lowe's has been grabbing customers away from its bigger rival Home Depot (HD), as the Atlanta retailer's recently ousted CEO Robert Nardelli fought with his shareholders and staff over how to run the business during recent years. According to the 2005 American Customer Satisfaction Index, Home Depot ranked worst among specialty retailers, while Lowe's satisfaction rating was second only to Costco (COST). In 2001, as Nardelli's tenure began, Lowe's and Home Depot had been tied [see BusinessWeek.com, 1/4/07, "A Sharper Edge for Lowe's"].



"We favor longer-term industry demographics, and believe LOW is well positioned for above-market growth when housing market recovers," Standard & Poor's equity analyst Michael Souers said in a Feb. 23 research note. [S&P, like BusinessWeek.com, is owned by The McGraw-Hill Companies.] Expecting the housing market to deteriorate further in 2007, Souers lowered his estimate on Lowe's earnings per share for fiscal year ended in February, 2008 to $2.08 from $2.12. But then Souers thinks Lowe's will earn a much healthier $2.41 in fiscal 2009.



During the fourth quarter Lowe's net earnings amounted to $613 million, or 40 cents per share, down 11.5% compared to the same period last year. But the company expects to earn between 49 cents and 51 cents in the next quarter. Then during the full fiscal year ended February, 2008 Lowe's says it will earn $2.02 to $2.09 per share.