Lowe's Swings And Misses With Earnings And Guidance In Second Quarter Report

Aug.21.12 | About: Lowe's Companies, (LOW)

Home improvement retailer Lowe's (NYSE:LOW) reported weak second quarter earnings on Monday. The second largest home improvement retailer (behind Home Depot) saw its shares fall after cutting full year earnings guidance.

In the second quarter, Lowe's saw net earnings drop 10% to $747 million. Earnings per share came in at $0.64, essentially flat from last year's second quarter. The company saw sales of $14.2 billion during the quarter, which was a drop of 2%. Lowe's did blame part of the drop in sales from week shifts due to last year's reporting 53 week year. The extra week and the related week switch had an impact of $259 million in the quarter. Gross margins also shrank to 33.9%, from 34.5%. Analysts were expecting $0.70 in earnings per share from sales of $14.46 billion.

Same store sales fell for Lowe's stores by 0.4%. In the United States, same store sales were close to even, with a drop of 0.2%. Home Depot (NYSE:HD) recently reported same store sales growth of 2.1%, including an increase of 2.6% in American stores. At the start of August, Lowe's had 1748 stores in the United States, Mexico, and Canada.

The earnings miss and lowered guidance is the complete opposite of what Home Depot recently reported. I wrote recently about Home Depot shares hitting new twelve year highs with updated guidance. Here is a comparison between the two retailers:

HomeDepot Lowe's
StoreCount 2255 (end of Q2) 1748 (end of Q2)
SharePrice $56.78 $26.53
DividendYield %2.2 %2.4
Estimated SalesGrowth %4.6 %0
Fiscal EPSYearEstimates $2.95 $1.64
EPSAnalystsEstimates $2.92 $1.80
Price Earnings (Ratio)Company 19.2 16.2
Quarterly Same StoreSales +%2.1 -%0.4
Click to enlarge

In the second quarter, Lowe's repurchased $1.0 billion of its own shares. The 36.8 million shares bought back were at an average of $27.17 a share. In the last six months, Lowe's has repurchased over 94 million shares. The company spent $2.75 billion in the last two quarters acquiring shares at an average price point of $29.03. Lowe's also increased its quarterly dividend to $0.16, from a payout of $0.14 in last year's four quarters.

Lowe's updated guidance calls for flat sales for this fiscal year. Lowe's posted sales of $50.21 billion in the last fiscal year. The company also sees diluted earnings per share of $1.64. Analysts are targeting earnings per share of $1.80 on the fiscal year. The full year target for sales is $50.57 billion. Both estimated numbers are now far off from company guidance.

Shares of Lowe's are up 2.9% on the calendar year. Shares have traded between $18.28 and $32.29 over the last fifty two weeks. Monday saw shares drop to $26.26, still above the mid range point of the year's prices. Despite reaching new highs, I think Home Depot is the better stock to own in the home improvement sector. Home Depot made a recent acquisition that will help earnings next year and is also expanding its store count in Mexico.

If you're looking for a way to play the housing recovery and not sure whether to buy Home Depot or Lowe's, you can get exposure to both with the PowerShares Dynamic Building and Construction ETF (NYSEARCA:PKB). The exchange traded fund is up 21% on the calendar year and counts Home Depot and Lowe's both as top holdings with over 5% allocations.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.