2nd UPDATE: Lowe's Shares Jump on Hints Transformation Gains Foothold

Date : 11/19/2012 @ 2:15PM
Source : Dow Jones News
Stock : Lowes Companies, Inc. (LOW)
Quote : 78.23  0.19 (0.24%) @ 4:06PM
Lowes Companies share price Chart

2nd UPDATE: Lowe's Shares Jump on Hints Transformation Gains Foothold

Lowes Companies (NYSE:LOW)
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--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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