Lowe's Continues To Lose Share To Home Depot

| About: Lowe's Companies, (LOW)

Home improvement giant Lowe's (NYSE:LOW) reported disappointing second quarter results Monday morning. The retailer continues to lose share to Home Depot (NYSE:HD), despite improvement in the US housing market. Shares continue to converge to our $25 fair value estimate, which remains unchanged.

For its second quarter, revenue fell 2% year-over-year to $14.3 billion, less than the consensus call for revenues to be roughly flat. Aggregate same-store sales fell 0.4%, US same-store sales fell 0.2%, and both measures were incredibly poor compared to Home Depot's 2.6% gain during the same period. Adjusted earnings weren't great either, coming in flat year-over-year at $0.65 per share and nearly $0.05 lower than the Street predicted. However, the core performance was even weaker than the headline number after considering the company bought back $1 billion in stock during the second quarter (and the company's shares outstanding are 9% lower than during the same period last year).

Though both Home Depot and Lowe's were negatively impacted in the second quarter by the unseasonably warm first quarter, Lowe's cannot seem to keep pace with its larger competitor. Unlike Home Depot, which nicely leveraged SG&A reductions, Lowe's was unable to drive sufficient traffic for its cuts to have a positive impact on earnings. We suspect Lowe's isn't just losing share to Home Depot, but likely smaller, regional competitors as well--since housing spending appears to be growing.

We had assumed that the secular tailwinds would be strong enough to lift the company's results, but Lowe's continues to be challenged. Looking ahead, things don't look much better. The home improvement retailer cut its fiscal 2012 earnings forecast to $1.64 per share from the range of $1.73-$1.83 per share and cut its revenue growth to flat, from 1-2% growth.

Still, even with Home Depot stealing market share, Lowe's managed to generate $1.7 billion in free cash flow year-to-date, down from a year ago, but still relatively strong. Regardless, we're not fans of the struggling retailer at current levels, as shares are fairly valued and score just a 4 on the Valuentum Buying Index (our stock-selection methodology).

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.

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