Lowe's Trip Could Presage Home Depot Tumble

The selloff in Lowe's ( LOW) shares on Monday may portend bigger problems for rival Home Depot ( HD).

Lowe's shares dropped more than 7% in morning trading after the company reported its first-quarter earnings. Lowe's met the high end of its own earnings guidance and topped analysts' earnings expectations. But its sales came in lower than the company or analysts had projected.

The focus on sales may bode poorly for Home Depot, which reports Tuesday and whose sales performance has been lagging Lowe's amid a turnaround effort.

"If these guys are struggling, Home Depot will be struggling," said one fund manager who asked not to be named. "I suspect Home Depot will be doing really poorly."

Lowe's reported on Tuesday that it earned $421 million, or 53 cents a share, in its quarter ended May 2. On a per-share basis, the company's earnings were up 20% from the year-ago period, when the retailer earned $346 million, or 44 cents a share.

Overall, Lowe's sales grew 11% year over year to $7.21 billion in the quarter. But on a same-store basis, which compares results of outlets open more than one year, sales increased 0.1% year over year.

Lowe's had projected that it would post earnings of 51 to 53 cents a share in the quarter. But the company expected 15% overall sales growth on a 2% to 4% increase in comparable-store sales.

Lowe's topped analysts' earnings estimates by 1 cent but missed its revenue target by about $200 million, according to Thomson First Call.

That revenue miss likely spooked investors, said analysts.

"The Street had them at 2% comps. That was a pretty unrealistic expectation," given what other retailers have reported, said the fund manager. Given the poor weather in the first quarter and the war,"these are decent results," the fund manager said.

But investors weren't in a forgiving mood Monday morning.

In late-morning trading, Lowe's shares were off $3.26, or 7.36%, to $41.04.

Shares of rival Home Depot took less of a hit. In recent trading, the company's stock was off $1.09, or 3.73%, to $28.10.

But that could change on Tuesday, when Home Depot reports its first-quarter results. Although the company beat fourth-quarter expectations, the bar was set fairly low as Home Depot reported declining profits and same-store sales.

Home Depot declined to give quarterly guidance for 2003 when it reported its fourth-quarter results. For the year, the company expects sales to rise 9% to 12%, while earnings increase from 9% to 14%.

In the first quarter, analysts are projecting that Home Depot will earn 37 cents a share on $15.05 billion in sales. In the year-ago quarter, the company earned $856 million, or 36 cents a share, on $14.28billion in sales.

But Home Depot's same-store sales growth has been trailing Lowe's by a wide margin. For all of last year, Home Depot's comparable-store sales were flat, while Lowe's grew by 5.6%.

That could well mean that Home Depot posted negative same-store sales in the first quarter, possibly jeopardizing its ability to meetearnings expectations.

"That wouldn't surprise me," said the fund manager.

On a conference call with analysts, Lowe's officials blamed the company's sales shortfall on the weather. Not only did cold February weather dampen sales in the Northeast and other areas of the country,but heavy rains slowed sales in April, they said.

Although sales were light at Lowe's, the company was able to boost its earnings by expanding its gross margin. In the quarter, Lowe's gross profit margin increased 1.33 percentage points to 31.04% ofsales. Gross profit margin is the difference between what a company charges customers for its products and what it pays vendors for them.

Lowe's profit margin increased because of a better mix of products sold, lower product costs and a decline in "shrink," or lost inventory, company officials said.

Although the company increased its gross margin, it lost some ground on its operating expenses. Lowe's sales, general and administrative expenses increased 58 basis points to 18.22% of revenue. Company officials attributed payroll increases. The company wanted to maintain staffing levels in its stores, despite the slow sales.

"We didn't feel it was wise to pare down staff levels while we waited for the weather to improve," they said.

More from Stocks

Is the Cannabis Crazy Equivalent to the Dot Com Bubble? Watch!

Is the Cannabis Crazy Equivalent to the Dot Com Bubble? Watch!

Eventbrite Shares Surge in NYSE Debut

Eventbrite Shares Surge in NYSE Debut

AeroGrow International Is Ready to Sprout With the Cannabis Surge

AeroGrow International Is Ready to Sprout With the Cannabis Surge

Dow, S&P 500 Jump to Record Highs; Wall Street Looks Past Trade Fears

Dow, S&P 500 Jump to Record Highs; Wall Street Looks Past Trade Fears

GE Stock Won't Be a Buy Until It Acts Like George Costanza

GE Stock Won't Be a Buy Until It Acts Like George Costanza