High Note at Lowe's

The home improvement retailer shakes off slowdown talk.
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Updated from 12:08 p.m. EST

Lowe's

(LOW) - Get Report

reported a stellar quarter Monday, continuing a strong showing by the home improvement sector, and the retailer said it has little concern about the softening real estate market and any potential effects on its business.

The nation's No. 2 home improvement chain said it earned $695 million, or 87 cents a share, in the fourth quarter ended Feb. 3, up from $508 million, or 64 cents a share a year ago. Analysts, on average, were expecting earnings of 80 cents a share, according to Thomson First Call.

On the top line, Lowe's sales grew 26% from last year to $10.8 billion, while same-store sales rose 7.8%. Wall Street expected total sales of $10.44 billion.

Meanwhile, the retailer expects to extend its strong performance into 2006. For the current quarter, Lowe's expects to earn 92 cents to 94 cents a share, above analysts' mean estimate of 88 cents. The company's projection is based on a forecast for a 5% to 7% rise in same-store sales, and Chief Executive Robert Niblock said on a conference call that first-quarter sales are trending in that range.

For the full fiscal year, Lowe's expects earnings in a range from $4.03 to $4.13 a share, compared with Wall Street's expectation of $3.95 a share. The company projected an annual same-store sales gain of 5% to 6%.

"These are very strong numbers that point to a company operating on all cylinders," says Craig Johnson, president of consulting company Customer Growth Partners. "I don't care what kind of business you are. When you have annual sales of $43 billion, and you're growing you're top line at this rate, you're doing an exceptional job."

The chain's fourth-quarter triumph comes a week after its larger rival,

Home Depot

(HD) - Get Report

, delivered an

upside surprise of its own. Its fourth-quarter profit rose 23% to $1.29 billion, or 60 cents a share, beating estimates by 4 cents

Johnson, who owns shares of both Lowe's and Home Depot, says Monday's results reinforce his perception that Lowe's, though smaller, is the top-performing company in its space at the moment.

"Lowe's has better growth prospects these days," he says. "It's comps are a bit stronger. It's growing its profit margins faster, and it looks to me like they've figured out how to be more profitable in certain areas of the business, like home-installation sales, for instance."

Both retailers have been consistent performers in a retail sector that has been choppy elsewhere as consumers grapple with soaring fuel prices and rising interest rates. Economists have pointed to a roaring real estate market as one of the chief engines for consumer spending in the current economic expansion, and home improvement retailers are riding the wave. While it's growing clear that the housing market is in the midst of a cooldown, some observers say larger demographic trends, like the onset of retirement for the baby boomer generation, are a boon for the likes of Lowe's and Home Depot.

The Commerce Department reported Monday that sales of new single-family homes

dropped by 5% month over month to a seasonally adjusted annual rate of 1.233 million units in January. The decline was larger than economists were expecting, and the data provided fodder for those who see rising mortgage rates bringing an end to the five-year housing boom. The economic consequences of a housing slowdown are unclear, but Niblock said Lowe's isn't dependent on the market for new homes.

"We're in the business of maintenance on existing homes," Niblock said. "We've never been in the housing construction business."

He pointed to the record levels of home ownership in the U.S. and a low unemployment rate as the relevant data points for a macro angle on Lowe's business. Looking ahead, he expects real personal income growth of about 3.4% for 2006, compared with 1.4% in 2005.

"These are strong indicators for home improvement sales," Niblock said.

Shares recently were up $2.96, or 4.5%, to $68.48.