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Home Depot Woes Worse Than Lowe's

Both retailers had weak first quarters, but analysts say Lowe's is faring better.

Lowe's

(LOW) - Get Lowe's Companies, Inc. (LOW) Report

first-quarter report Monday was nothing to be excited about, but analysts say the retailer at least continues to be in better shape than its larger rival,

Home Depot

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Shares of Lowe's slid 2.4% to $31.88 Monday after the home-improvement giantmissed first-quarter earnings targets and lowered its full-year outlook. The company attributed the weak results to bad weather and an even worse housing market, but said it expects to benefit from easier comparisons in the second half of the year.

Last week, Home Depot also cited bad weather and a slumping housing market as reasons for

missing first-quarter targets. But its performance was viewed as weaker than Lowe's.

"I think Lowe's is suffering from the same problems

as Home Depot, but not to the same degree," says Michael Appel, a restructuring specialist with Quest Turnaround Advisors. "I think

Lowe's business is healthier."

Lowe's earned $739 million, or 48 cents a share, for the quarter ended May 4, down 12% from the year-ago $841 million, or 53 cents a share. Sales rose to $12.17 billion from $11.92 billion a year earlier.

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Analysts surveyed by Thomson Financial projected a 49-cent profit on sales of $12.46 billion.

Sales in established stores fell 6.3% from a year ago. At Home Depot, same-store sales declined 7.6% in the first quarter, while overall profits fell 29%.

Craig Johnson, president of consulting firm Customer Growth Partners, points out that Lowe's has actually gained market share during the home-improvement market slump, while Home Depot has lost ground.

"Lowe's kept investing in the business with marketing and customer service," he says.

According to Johnson, Lowe's overall share in the home-improvement market increased about 60 basis points over the year-ago quarter, while Home Depot's market share declined about 30 basis points. Lowe's also gained share in 17 out of 20 product categories.

Lowe's did post a decline in market share of major appliances, while Home Depot saw growth in this category. But Johnson says Home Depot achieved these gains by substantially cutting prices on appliances, which already hold thin margins.

In the first quarter, Lowe's gross margin inched up two basis points over the year-earlier period, while Home Depot's gross margin slid about 80 basis points. Both companies saw their operating margins decline, but Lowe's dropped 170 basis points, while Home Depot's was down 280 basis points.

Johnson said Lowe's saw an average ticket price was $68.22, while Home Depot's was $59.01. Both companies' average customer ticket was down about 3% year-to-date, but the number of transactions increased 5.9% at Lowe's and fell 1.2% at Home Depot.

Lowe's higher transaction count was able to more than offset its average ticket decline, leading to its 2.1% increase in total quarterly sales year to date, Johnson says. Conversely, both transaction counts and average tickets declined at Home Depot, combining to yield its 4.3% decline in retail sales.

George Whalin, president and CEO of Retail Management Consultants, says Lowe's offers more popular merchandise than Home Depot. He noted that while the commercial side of the home-improvement business suffers, homeowners "are still fixing their toilets and painting their houses."

Whalin says Lowe's has also proven to be more popular with women, a growing segment of the home-improvement market.

"We have the highest number of single-person home owners in American history," he said. "A lot of those home owners are women and instead of calling a plumber or a painter, they're doing it themselves."

For the full year, Lowe's now expects to earn $1.99 to $2.03, down from its earlier guidance of $2.02 to $2.09 a share and roughly flat with fiscal 2006 earnings of $1.99 a share.

Home Depot, meanwhile, expects 2007 earnings to decline 4% to 9% from last year's levels, and said last week that the profit will be toward the low end of that range.