Lowe's and Home Depots' Good Earnings - Still, A Bleak Future

By Chris Barrella

Lowe’s (LOW), the world’s second largest home improvement retailer, reported better than expected numbers on Monday as the fall of the housing market continued to dampen sales for home construction and improvement products. Investors celebrated as diluted earnings per share came in five cents above analysts expectations at 33 cents per share, even though net income for the quarter was down 24 percent from the same period in 2007 to $488 million.

Comparable store sales, another good gauge for how a company is performing, declined 5.9 percent for the quarter. Nonetheless, sales for the quarter increased 1.4 percent to $11.7 billion, up from $11.6 billion in the third quarter of 2007, beating estimates calling for $11.62 billion. Lowe’s also continued its expansion project during the quarter as they added 39 new stores.

“The third quarter continued what has been a very difficult period for our industry as many exterior factors weighed on home improvement sales,” Lowe’s Chairman and Chief Executive Robert Niblock told investors during a conference call.

As for the world’s largest home improvement retailer, Home Depot (HD), there was a similar celebration for equally positive earnings news. Early Tuesday the company reported net earnings of $756 million, or 45 cents per diluted share, compared with $1.1 billion, or 60 cents per diluted share, in the same period last year. Analysts were looking for 38 cents per share. Sales for the third fell 6.2 percent from the same period last year to $17.8 billion, due to comparable store sales dropping 8.3 percent.

Frank Blake, chairman & CEO, said:

The housing and home improvement markets remain challenging. Across our entire business, we are making the adjustments necessary to respond to a tough market environment.

Fourth Quarter 2008 and Beyond

Even with the positive earnings news this week, the country’s two largest home improvement providers have less than cheery expectations for the upcoming holiday season. Lowe’s is predicting total sales to range from a three percent decline to a two percent increase, with comparable store sales to fall between five and ten percent. They also lowered earnings guidance for the quarter from 18 cents per share to a range of 8 to 16 cents per share. The opening of 33 to 38 new stores during the fourth quarter could possibly offset higher sales losses, but not affect the drop in comparable store sales. For the year, Lowe’s is expecting total sales to range from flat to a minimal one percent rise, and comparable stores sales to fall six to seven percent.

Home Depot is expecting further losses as well going into the end of the year with total sales for the year down 8 percent. They did however reiterate that earnings per share for continuing operations will be down around 24 percent for the year amid continued deterioration of demand for home improvement materials.

Quotes from Lowe’s CEO

… consumers continued to delay discretionary home improvement and bigger ticket purchases, which resulted in negative comparable store sales in the quarter.

We expect continued, broad-based external pressures on our industry, as rising unemployment, falling home prices, tight credit and volatile equity markets continue to erode consumer confidence and impact sales. While falling energy prices and initial signs of stabilization in housing turnover should aid the consumer, we saw a decline in sales trends in the last week of October that continued into November as the overall economic outlook deteriorated.

Conclusion

As foreclosure rates have hit staggering heights over the past 12-18 months, there has been less demand for the products and services offered by Lowe’s and Home Depot. Also, as the credit markets continue to tighten and prevent consumers from taking cheap loans, even the homeowners who were in strong financial position simply did not want to throw the extra money out there to replace their roof or install a new deck. Oil and gas prices have also played a major role in the decrease in discretionary spending over the quarter. As prices drop, this should help stimulate some more spending but nothing to get too excited about.

Lowe’s was up as much as 10 percent during the trading session on Monday as investors digested the news. However, on a up-and-down day for the markets on Tuesday, shares remained volatile and offered little assurance for stability. Home Depot also was up over 7 percent during the trading day on Tuesday, finally settling up 3.5 percent.

However, don’t be fooled by these seemingly encouraging numbers. Even as some investors feel these stocks may be undervalued, the housing market has yet to show much concrete evidence that the worst is over and the credit markets remain a mystery. Lowe’s and Home Depot will remain under pressure until both of those issues show some relief.

Disclosure: None

Comments

[User 311833:]

I'm a department manager at a Tampa Lowe's and I can tell you that we're moving nowhere near that amount of product that we did last year. My district manager told me it's a matter of weeks before corporate announces store closings. We're in for a dark future indeed!

-Frank
www.patrioticactivist....

2008 Dec 03 10:51 AM