Updated from 7:33 a.m. EST

Lowe's

(LOW) - Get Report

fourth-quarter report was full of highlights, but investors still sold the stock.

Propelled by strong sales and costs controls, the home-improvement retailer reported earnings Monday morning that topped Wall Street's earnings estimates and its own guidance. Lowe's earnings outlook for the first quarter and for the full year, adjusted for an accounting change, also topped analysts' expectations.

Still, fourth-quarter revenue results were shy of estimates, and the company's shares were recently off $1.84, or 3.2%, to $56.54. That's a change from their recent trend; through Friday, Lowe's shares had risen more than 8.5% since the end of January.

In its just-completed quarter, Lowe's earned $407 million, or 51 cents a share, on $7.25 billion in sales. Excluding the company's recently sold Contractor Yard business, it would have earned 50 cents a share.

Analyst surveyed by Thomson First Call had been forecasting earnings of 50 cents a share on sales of $7.31 billion in the quarter.

The company's earnings per share from continuing operations were up 25% from the fourth quarter a year earlier, while its sales rose 20.1% from last year's $6.04 billion.

Some investors may have been disappointed by the company's sales, but the disparity between Lowe's same-store sales growth and that of chief rival

Home Depot

(HD) - Get Report

is narrowing, noted, Jay Ferguson, a portfolio manager at Ferguson, Andrews Investment Advisers. Still, Ferguson said he was impressed with Lowe's quarter.

"I thought it was a good report," he said. "Overall, their sales grew 20%. There's not too many people who can do that."

Ferguson Andrews, which manages over $60 million in assets, is long both Lowe's and Home Depot.

For the first quarter of 2004, Lowe's expects to earn 52 cents to 54 cents a share on same-store sales growth of 6% to 7%. Excluding the effects of an accounting change, the company forecast earnings of 65 cents to 67 cents per share.

For the full year, Lowe's predicted profits of $2.63 to $2.66 a share on sales of about $36.08 billion. Without the accounting change, Lowe's estimated it would earn $2.76 to $2.79 this year.

Apparently hoping to placate investors concerned about the effect of the accounting change, Lowe's officials offered guidance for fiscal 2005. Next year, the company expects to earn $3.29 to $3.34 a share on sales of about $42.21 billion.

All three adjusted earnings estimates were above analysts' expectations, although the sales are lower than Wall Street's projections. In the first quarter, analysts are looking for profits of 59 cents a share on $8.61 billion in sales. Wall Street expects the company to earn $2.68 a share for the full year this year and $3.25 a share in 2005 on sales of $36.50 billion and $42.39 billion, respectively.

In the fourth quarter, Lowe's sales proved strong no matter how you sliced them. The company's same-store sales -- which compare results at outlets more than a year old -- grew by 7.3% in the quarter. All of its product categories posted positive same-store sales growth and the company posted comparable-store sales gains in 17 of 18 regions, company president Robert Niblock said on a conference call.

On the cost side, Lowe's kept in check both its product costs and its operating expenses. The company's gross margin -- the difference between what a company charges customers for its goods and services and its direct costs of acquiring and providing them -- increased 23 basis points in the quarter to 32.0% of sales.

The increase in the company's gross margin was due to a reduction in inventory costs and a drop in shrink, or lost inventory, said Bob Hull, Lowe's chief financial officer. The company's gross margin would have been even higher, except that it sold a higher proportion of lumber in the fourth quarter, Hull said. Lumber, a low-profit product, tends to weigh on gross profit margins.

Meanwhile, the company's operating expenses fell 7 basis points to 19% of sales. Payroll and store occupancy expenses grew slower than sales, as did employee bonuses, Hull said. Those savings made up for increases in various insurance costs, including workers compensation and general liability insurance, he added.

In the first quarter and next year, Lowe's expects its earnings to be depressed by the adoption of a new accounting standard that governs how companies recognize promotional revenue from vendors.