Lowe's Hits a High Note

Lowe's ( LOW) isn't ready to go slow.

The growth-happy home improvement retailer posted stronger-than-expected second-quarter earnings Monday and forecast a solid second half. The company's remarks make it a rare retailer to offer rosy comments amid widening worries of a second-half consumer-spending pullback.

The strong results also continue a run that has moved Lowe's ahead of rival Home Depot ( HD), due to post quarterly earnings Tuesday, in many investors' minds. Though both stocks are down for the year, the prospect of a standout second-half performance could send investors back into these names. Lowe's jumped $3.81 to $40.60, while Home Depot rose 99 cents, or 3.5%, to $29.09.

Optimism

Lowe's reported second-quarter net income of $467.1 million, or 59 cents a share, up 40.5% from a year ago. On average, analysts had expected Lowe's to earn 54 cents a share, according to Thomson Financial/First Call. Sales jumped 22.2% to $7.5 billion, slightly ahead of analysts' projections.

"We're not experiencing the collapse of consumer spending that some have predicted," said Robert Tillman, Lowe's chairman and CEO, in a conference call with analysts and investors. "We continue to remain optimistic about the trends in home improvement spending."

Lately a number of indicators have raised worries that the consumer is finally tightening his belt. A nine-point dip in consumer confidence in July, along with warnings from a number of apparel companies and electronics giant Best Buy ( BBY), have had investors fleeing retailers.

But the strong growth in the home improvement and furnishing sector that began after Sept. 11 appears to be going strong.

Gross margins at Lowe's showed impressive growth, improving to 29.4% from 28% in the year-ago period. Going forward, Lowe's said it expects earnings of 39 cents to 40 cents per share in the third quarter, in line with projections. But because of the better-than-expected second quarter, it raised full-year guidance to $1.74 to $1.75 per share; analysts had expected earnings of $1.71 for 2002, according to First Call.

Also Monday, Lowe's said it would begin expensing stock options. The company said this is expected to dent earnings by 3 cents a share in 2003 and 9 cents per share in 2004.

Awareness

Home Depot's decline this year has been triggered by both worries about how much growth is left at the chain, the nation's largest do-it-yourself outfit, and a growing awareness by investors that Lowe's is the place to put money in the sector.

Wilkesboro, N.C.-based Lowe's is seen as having much more growth potential than Home Depot. It operates 806 stores, compared to about 1,440 for Home Depot. And lately, Lowe's has been expanding into markets, particularly in the Northeast, that put it in direct competition with Home Depot stores. In addition, Lowe's earnings and sales growth has been more impressive. Home Depot is expected to report a 13.5% gain in sales and 20.5% jump in earnings, solid numbers but less than Lowe's.

Meanwhile, Lowe's stock has outperformed Home Depot's, and now trades at a higher multiple. Lowe's trades at 18 times next year's earnings, while Home Depot trades at a P/E ratio of 15.

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