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Spectators will be looking for signs that

Home Depot

(HD) - Get Home Depot, Inc. Report

is off the canvas and landing punches when it and


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

report earnings this coming week.

"Investors are likely to watch the relative change in comps between Home Depot and Lowe's in the fourth quarter and may worry about the potential impact on Lowe's if Home Depot's comps continue to improve," said UBS analyst Gary Balter. ("Comps" are same-store sales.) Competition between the two home improvement giants could heat up if Home Depot starts to reap the benefits of its store revitalization program, and the novelty of Lowe's expansion program fades.

Analysts are looking for in-line to slightly above-consensus earnings at both companies, with solid comps, too, as retail sales in the home improvement market jumped 14.2% in December and 9% in January, according to the U.S. government.

Home Depot has been battling to close the gap between it and Lowe's in terms of same-store sales for more than a year. In the fourth quarter of 2002, its same-store sales were down 6%, while Lowe's rose 4.1%. In the first quarter of 2003, its same-store sales fell 1.6%, while Lowe's were up 0.1%. In the second quarter of 2003, Home Depot's same-store sales were up 2.2%, Lowe's were up 6.9%; and in the third quarter of 2003, Home Depot's were up 7.8%, while Lowe's were up 12.4%.

Analysts expect Home Depot to earn 39 cents a share when it reports its fourth quarter Tuesday. Balter expects Home Depot to surpass its own 7.2% same-store sales outlook, although he thinks the key to the quarter's results will be January's retail sales figures.

At its analyst meeting last month, the company gave an

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updated forecast of 17% to 19% EPS growth, which implies earnings of 38 cents to 41 cents share. Even with the updated guidance, Balter sees the potential for EPS upside. (UBS has an investment banking relationship with Home Depot and Lowe's.)

Balter said he sees strong same-store sales performance at Home Depot because of the

solid performance of other retailers in January as well as high wood prices, which rose about 20% in the quarter, compared with the same quarter in 2002, he said.

Lehman Brothers analyst Alan Rifkin sees a penny of potential upside to Home Depot's earnings and expects same-store sales to rise by at least 7%. "Higher lumber prices and the improved macro environment have continued to benefit sales," he said, also citing improved store service and merchandising. (Lehman Brothers does investment banking for Home Depot and Lowe's.)

Meanwhile, Morgan Stanley analyst Gregory Melich expects Home Depot's same-store sales to rise by as much as 8% for the quarter.

For Lowe's, Balter said he wouldn't be surprised to see upside to the consensus estimate of 49 cents a share when the company reports on Monday, particularly if it has higher-than-expected quarterly same-store sales. Wilkesboro, N.C.-based Lowe's has forecast fourth-quarter same-store sales growth of 6% to 7%.

Rifkin agreed that Lowe's fourth-quarter same-store sales should come in higher. He has forecast an 8% increase, also citing improved lumber prices, and expects earnings to beat consensus by a penny at 50 cents a share. Morgan Stanley's Melich expects positive 9% comps at the company.

Additionally, look for each company's stock to be positively affected by comp-sales performance. "This comp gap has been shown to be an indicator of the relative performance of Home Depot and Lowe's stocks," said Balter.

If the companies are able to take out their same-store sales targets, the stocks should move upward. Shares of Home Depot are currently up about 64% year over year, and trading around $36, they are close to the 52-week high of $37.89 reached on Nov. 3. Similarly, Lowe's shares are up about 64% year over year, and trading at around $58, they are within reach of the 52-week high of $60.42 also hit on Nov. 3.

Looking ahead, while Balter thinks the "comp gap" between the two competitors might tighten in the fourth quarter, it could swing back into Lowe's favor again in the current first quarter. Balter's longer-term worry for Lowe's is the impact of higher interest rates on the company's results. He believes, though, that Lowe's can continue its strong comps even "in the face of a weaker macro environment." He said the company is still in the process of rolling out new offerings in installed sales, special orders and commercial sales.

At Home Depot, the analyst forecast a commitment to "fixing stores" and dedicating time to customer service. He sees low-to-mid double-digit bottom-line growth in 2004. However, Balter forecast deficiencies in distribution and merchandising systems that "will likely become more glaring as

Home Depot grows in smaller markets."