Lowe's Follows Leader

The retailer echoes Home Depot's caution about the housing market and cuts guidance.
Author:
Publish date:

Updated from 7:36 a.m. EST

The weak housing market continues to weigh on

Lowe's

(LOW) - Get Report

, which followed the tracks of larger rival

Home Depot

(HD) - Get Report

in cutting its guidance for the full year as it battles lower demand for home-related goods.

The nation's No. 2 home improvement chain did manage to post third-quarter earnings that beat forecasts, though its sales missed estimates.

The lowered guidance wasn't a complete surprise, as Lowe's had warned in September that full-year earnings would be near the low end of its prior forecasts. Investors, expecting worse, sent shares higher Monday. The stock recently was up 45 cents, or 1.5%, to $30.93.

In addition to the slowing U.S. housing market, Lowe's said it has been hurt by deflation in certain commodity categories, and a tough comparison to last year's hurricane recovery and rebuilding efforts.

"We believe many external headwinds will exist through the balance of the year and the first half of fiscal 2007, but as we look to the future, we are confident that solid longer-term drivers of our industry remain," CEO Robert Niblock said in a statement, noting the company was seeing solid performance from its new stores.

Lowe's cautious statements follow similar sentiments last week from Home Depot, which reported a 3% drop in third-quarter profits and lowered its fourth-quarter forecast due to the housing market slowdown.

"They're both operating in a much more challenging environment, although Lowe's seems to be weathering the storm a touch better," says Craig Johnson, president of retail consultant Customer Growth Partners. "Consumers are being a little more cautionary than they have been in the past. They're keeping their powder dry and trying to see what happens in the housing market."

For the third quarter ended Nov. 3, Lowe's earned $716 million, or 46 cents a share, up from the year-ago $646 million, or 40 cents a share. Revenue rose to $11.21 billion from $10.59 billion a year earlier, while same-store sales dropped 4%.

Analysts surveyed by Thomson First Call predicted earnings of 43 cents a share and sales of $11.5 billion.

Looking ahead, Lowe's forecast fourth-quarter earnings of 36 cents to 38 cents a share, below Wall Street's 41-cent estimate. The retailer expects same-store sales to fall 4% to 6% from a year ago. Total sales are expected to slip 4% from last year's figure of $10.8 billion.

For the full year, Lowe's cut its earnings forecast to $1.95 to $1.97 a share from an already lowered view of $2 to $2.07 a share. Analysts, on average, target earnings of $1.97 a share.

Lowe's expects full-year sales to rise 9% from the year-ago total of $43.2 billion. Same-store sales are expected to be flat.

During a conference call with analysts Monday, CEO Niblock said that Lowe's lowest same-store sales were in the areas that had seen a lift in sales during intense hurricane rebuilding efforts last year. There were also weak sales in California and in the Northeast, where home prices appreciated slowly or declined.

Meanwhile, the holiday season likely won't be particularly merry for either Lowe's or Home Depot. C. Brit Beemer, chairman and founder of consumer research firm America's Research Group, says the retailers "lack the driving power to get on many shopping lists for Christmas," as most consumers are focused on buying gifts rather than improving their homes.

"Lowe's has a solid track record," Beemer says. "They have a good operation and the customers are relatively happy. They're in a battle with Home Depot and I think in retail it's good to have an enemy. It gives you something to focus on."