Lowe's Fans the Flames

Despite the retailer's strong first quarter, investors are still fretting that the consumer will slow down.
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Updated from 7:55 a.m. EDT

Strong first-quarter results from

Lowe's

(LOW) - Get Report

provided little confidence to investors grappling with recent selloffs in the stock market and widespread concerns about the effects of rising interest rates on consumer spending and housing.

Shares of the home-improvement chain were recently down $2.73, or 4.4%, to $59.91, even after the company reported a 44% jump in first-quarter earnings on a 20% rise in sales -- beating analysts' expectations.

While Wall Street would normally greet such a performance with celebration, the company's comments about weakening sales trends in the current quarter fueled fears of a macroeconomic slowdown.

On a conference call, Lowe's management said May same-store sales were running at the low end of its guidance for 3% to 5% growth. After Lowe's larger competitor,

Home Depot

,

(HD) - Get Report

also reported

top-line softness for its first quarter, investors are worried that the nation's home-improvement chains, longtime beneficiaries of the U.S. housing boom, could feel pain if the situation deteriorates.

"This ties in with higher gas prices and is a more direct signal of at least weaker spending trends than others that pointed to similar trends last week," said Credit Suisse First Boston analyst Gary Balter in a research note. "In a nervous market where concerns over interest rates and the direction of the economy are leading stocks down, this will add fuel to the fire."

Lowe's said it earned $841 million, or $1.06 a share, for the first quarter, up from $586 million, or 73 cents a share, a year earlier. Sales rose 20% to $11.92 billion. Analysts expected earnings of 94 cents a share on total revenue of $11.84 billion, according to Thomson First Call.

The company forecast earnings of $1.21 to $1.24 a share for the second quarter, with sales growth of around 12%. Analysts were looking for a profit of $1.23 a share on revenue of $13.59 billion, or 14% sales growth. Lowe's said it faces a strong comparison with the year-ago quarter, along with the loss of a week of sales thanks to a calendar shift. For the year, Lowe's expects to earn $4.14 to $4.22 a share on 13% sales growth. Analysts were looking for earnings of $4.06 a share.

"Recent data suggest continued favorable trends in employment levels and income growth, which will offset some of the monetary pressures consumers are facing such as rising fuel prices and interest rates," said CEO Robert Niblock in a statement. "As trends in the housing market normalize from the rapid growth experienced over the past few years, we believe we have the programs in place to continue to capture share and deliver solid earnings growth."

In the first quarter, Lowe's posted a 5.7% same-store sales gain, with strong demand for its appliances and outdoor power equipment.

"Lowe's strong top-line growth was driven by market share gains in high-ticket items like appliances and outdoor power equipment, driving up the average customer ticket," said Morningstar analyst Anthony Chukumba in a research note. "We were actually more impressed by the operating margin, which jumped from 10.1% last year to 11.8% thanks to a higher gross margin and spreading robust top-line growth over fixed costs."

Lowe's first-quarter comps also reflected its growth prospects, which have lately given its shares a bit more sizzle than Home Depot's. The No. 1 home improvement chain stopped reporting quarterly same-store sales numbers when it posted its first-quarter results last week. It reported a 19% jump in earnings for the quarter that beat analysts' expectations, but its sales results fell short of estimates. Its CEO, Bob Nardelli, said on a conference call that he saw weakness in sales at the retailer's flooring business, which has been a key driver for the company.

Balter estimated that same-store sales for Home Depot's retail segment rose by about 1% in the quarter.

Also raising concerns on Wall Street, former Federal Reserve Chairman Alan Greenspan reportedly declared last week that the housing boom that has been a major engine of economic growth in the U.S. in recent years has come to an end.

"This has been quite an extraordinary boom," Greenspan told a Bond Market Association dinner in New York, according to media reports. "The boom is over. I think we can safely say that with a strong degree of confidence."

Also last week, a higher-than-expected rise in consumer prices put the markets on edge as the specter of inflation suggested that interest rates will continue going higher and consumers may ratchet back on spending. And the world's largest retailer,

Wal-Mart

(WMT) - Get Report

, said it is finally seeing the effects of

rising gas prices on its customers.

Even if housing construction slows and prices go lower, consumers could still spend on home renovations and improvements, which would continue to power earnings at Lowe's and Home Depot. In anticipation of more strength, Lowe's opened 24 new stores in the first quarter and said it expects to open another 155 in 2006. As of May 5, Lowe's operated 1,258 stores in 49 states.

"Recent data suggest continued favorable trends in employment levels and income growth, which will offset some of the monetary pressures consumers are facing, such as rising fuel prices and interest rates," Niblock said.