--Earnings rise on better sales and profitability and lower
charges
--Gross margin improves for first time in six quarters
--Shares rise as results top expectations and revenue outlook
improves
(Updates with comments from executives, details from conference
call and an analyst interview.)
By Joan E. Solsman
Investors rejoiced as Lowe's Cos. (LOW) 76% earnings increase in
the fiscal third quarter suggested its work transforming product
assortment may be paying off, though executives downplayed the idea
that Hurricane Sandy or an improving housing market was
helping.
Shares were up 6.5% at $34.05 in recent trading, at one point
hitting its highest level in more than five years. Even before
Monday's jump, the stock climbed 26% so far this year despite a
slump in results in the second quarter that sheared its outlook for
2012.
Lowe's has been reshaping its operations to better compete with
bigger rival Home Depot Inc. (HD), which has beaten Lowe's
same-store sales performance for years. The No. 2 chain has been
shifting to an everyday-low-price strategy and is reviewing all its
product lines with vendors to improve assortment and reduce unit
costs.
But in August, the company slashed guidance because executives
underestimated how long it would take for customers to respond to
the changes and for gross margins to fully reflect cost reductions.
Despite those struggles, the stock has continued to climb in
anticipation of housing recovery.
Monday, Lowe's said gross margin widened to 34.3% from 34.1%,
the first growth in a year and a half. Same-store sales rose 1.8%,
still behind Home Depot's 4.2% but better than the consensus
analyst estimate for about 1%.
The company said its transformation program contributed to both.
On a conference call to discuss results, Chief Customer Officer
Gregory Bridgeford said reset product lines that have finished
clearing out discontinued merchandise show a same-store-sales lift
in a midsingle-digit percentage and nearly a full percentage point
improvement in gross margin rate, while also reducing
inventory.
However, more than 80% of Lowe's categories have yet to reach
that point of the process.
RBC Capital Markets analyst Scot Ciccarelli said while the early
results from the resets were interesting, the data still derive
from a relatively small sample set over a time period of only about
two and a half months.
"Could this be the beginning of a recovery? I would hope so, but
we don't know yet," he said.
The executives also downplayed how the housing market or Sandy
contributed to results.
Chief Executive Robert A. Niblock said news indicating the
housing market is on the mend "provides a glimmer of hope" but
overall consumers remain cautious.
"With home prices having seemed to bottom, I do think that
improvement in discretionary spending will occur," he said in an
interview. "Ideally we would be through this reset process when
that gains traction," he added.
The company expects to complete the initiative by the middle of
next year.
Lowe's and bigger Home Depot both benefited from disaster
preparation at the end of the period that was spurred by Hurricane
Sandy in the northeastern U.S. Lowe's had the added benefit of some
initial Sandy repair demand, as its fiscal calendar closed a
handful of days later than Home Depot's.
But Lowe's estimated sales from hurricanes Isaac and Sandy this
year essentially offset sales related to Hurricane Irene last
year.
Given the scope of Sandy, RBC analyst Mr. Ciccarelli said he was
surprised the hurricane's effect wasn't bigger, but noted the
recovery from Sandy is likely to more closely resemble Katrina than
Irene: a prolonged period of slow repair largely from flooding
rather than wind.
For the quarter ended Nov. 2, Lowe's reported a profit of $396
million, or 35 cents a share, compared with $225 million, or 18
cents a share, a year ago. The most-recent period included
per-share charges amounting to five cents related to asset
write-downs, discontinued projects and insurance claims, while the
year-ago results included 18 cents in charges. Net sales rose 1.9%
to $12.07 billion.
Analysts polled by Thomson Reuters had predicted per-share
earnings of 35 cents on revenue of $11.92 billion.
Lowe's lifted its sales expectations for the year, predicting
same-store sales growth of about 1% and top-line revenue growth of
2% on a 52-week basis, compared with its prior view of 0.5% and 1%,
respectively. Lowe's had a 53rd week in the prior fiscal year.
Write to Joan E. Solsman at joan.solsman@dowjones.com and
Saabira Chaudhuri at saabira.chaudhuri@dowjones.com
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