Lowe’s Profit Drop: Not All That Bad

If I am being honest, I would have thought this number would have been much worse…

Lowe’s (LOW), #2 behind Home Depot (HD) reported quarterly earnings came to $607 million, or 41 cents a diluted share, compared with $739 million, or 48 cents a share, a year earlier, a 14% decrease. Net sales dipped 1.3% to $12 billion, with same-store sales falling 8.4%.

In February, Lowe’s projected earnings of 38 cents to 42 cents a share, 2% revenue growth and same-store sales down 5% to 7%.

“The challenging sales environment we have been experiencing for the past six quarters continued into the first quarter of 2008, and increasing financial pressures on consumers resulted in top-line sales that fell below our plan,” commented Robert A. Niblock, Lowe’s chairman and CEO. “The generally poor economic outlook, including well-known housing pressures, rising food and fuel prices and a more negative employment picture eroded consumer confidence and impacted discretionary purchases for the home.”

Now, I do not think anyone expected good results. These are poor but, here is the key:
“With our offering of great products and exceptional service, Lowe’s continued to gain market share in the quarter, and diligent expense control helped us achieve respectable earnings in spite of the headwinds facing the industry,” Niblock said

“Continuing to gain market share”. See, housing will eventually turn and Lowe’s is positioning itself through superior service and sensible balance sheet management to be ready to capitalize when it happens. Results will begin to look “less bad” as easier comps begin to come around this summer and into the fall and we will begin to get more of an apples to apples comparison for earnings based on housing levels.

Lowe’s is getting a larger piece of a smaller pie. When that pie expands (it will), their piece will grow in excess of Home Depot’s who inexplicably is still struggling with service issues and the hangover of promises made and not kept.

I have posted on Lowe’s a few times as to it’s attractiveness. It continues to be the one I would choose in the category.

Here are Q2’s expectations:
Second Quarter 2008 (comparisons to second quarter 2007)
— The company expects to open approximately 23 new stores reflecting
square footage growth of approximately 11 percent
— Total sales are expected to increase approximately 1 percent
— The company expects comparable store sales to decline 6 to 8 percent
— Earnings before interest and taxes (EBIT) margin is expected to decline
approximately 190 basis points driven by payroll, fixed costs,
depreciation and gross margin
— Store opening costs are expected to be approximately $22 million
— Diluted earnings per share of $0.54 to $0.59 are expected
— Lowe’s second quarter ends on August 1, 2008 with operating results to
be publicly released on Monday, August 18, 2008

I will let this quarter play out before making a decision. Should they hit the goals, I probably will be a buyer.

Disclosure (“none” means no position):None

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