Lowe’s 2Q results miss expectations, cuts outlook
Monday, August 20, 2012
NEW YORK (AP) — For Lowe’s, the improving housing market is still a bust.
The nation’s second largest improvement retailer cut its full-year-earnings and revenue forecasts Monday after posting a 10 percent drop in second-quarter net income. Revenue at stores opened at least a year, a key yardstick for measuring the health of the retailer, declined 0.4 percent.
Lowe’s results were hurt in part by a timing shift in how the retailer reported the quarter and a charge tied to job cuts. But the latest performance also shows the company’s efforts to revamp its merchandise and prices aren’t working while its rival Home Depot is getting a boost from the improving but still weak housing market.
In particular, Lowe’s return last summer to offering permanent low prices in many items across the store, instead of offering fleeting discounts, hasn’t yet resonated with shoppers who have been accustomed to seeing big sales signs. In fact, Lowe’s said Monday that it will take until the middle of next year to reap the benefits of the strategy. Earlier, Lowe’s said it would happen by the end of 2012. The company said it is taking apart its pricing plan to have a better balance between temporary promotions and permanent discounts based on what it’s learned from shoppers.
“We knew it would take time to see the full benefits of our actions,” Lowe’s chairman, president and CEO Bob Niblock told investors during a call Monday following the release. “The team is making progress on these initiatives, but frankly, the benefits are accruing at a slower rate than I had expected.”
Lowe’s performance is in contrast to last week’s upbeat report from Home Depot Inc. The nation’s largest home-improvement retailer boosted its full-year outlook, citing its performance so far this year. And said that strong cost controls and healthy sales of paint, bathroom accessories and kitchen installations helped lift its net income by 12 percent during the period. Revenue at stores opened at least a year rose 2.1 percent.
In a conference call last week with investors, Chairman and CEO Frank Blake noted that some of the strongest growth in the latest quarter came from the markets that were hit hardest in the downturn, such as California and Florida.
“These are encouraging signs of stabilization in the housing market,” Blake said.
Lowe’s, which has more than 1,700 stores, is finding itself in a much different position during the recession than it had been before the economic downturn. In fact, it wasn’t that long ago that Lowe’s was eating Home Depot’s lunch.
Heading into the housing bust in 2006, Mooresville, N.C.-based Lowe’s was successfully courting the female shopper and its merchandise was backed by strong marketing. Meanwhile, Home Depot was losing customers because of its poor customer service, a result of its former chairman and CEO Robert Nardelli’s moves to cut jobs to meet earnings targets.
Nardelli resigned in 2007 and was succeeded by its current CEO Frank Blake, who restored its service culture and offered exciting products. Home Depot also stuck to its everyday low price roots. Lowe’s, however, strayed from consistent low pricing, and relied more on temporary rampant promotions to attract frugal shoppers. That created pronounced peaks and valleys in the business that made it hard for the merchant operate efficiently. Analysts have also noted that Lowe’s merchandise didn’t keep pace with the changing consumer.
Over the past year, Lowe’s has been working on strengthening customer service and reviewing all of its products to lower costs and differentiate its product mix from its rivals. Lowe’s reviewed products that accounted for nearly half of its business and expects to reach about 90 percent by the end of the fiscal year. It declined to say how many items for which prices have been permanently lowered.
The company has also changed how it displays its merchandise in nearly 15 percent of its stores; it expects to do the same in about 50 percent of its stores by the end of the fiscal year. Additionally, it’s bolstering its e-commerce business to compete better with the likes of Amazon.com.
But Lowe’s still has a ways to go toward rejuvenating its business. The company said that it saw poor customer traffic over the Memorial Day weekend particularly in such areas as cabinets and countertops because of the lack of discounts. Officials said the company overcompensated by increasing promotions too much right afterward, thereby hurting profit margins.
“We knew it was going to be difficult, but we may have been more overly optimistic,” Niblock said during an interview with The Associated Press Monday.
Niblock said he thought shoppers would embrace the pricing plan more quickly because he expected the economy to recover more quickly.
“Housing has bottomed, and that makes home owners feel better,” he said. “But to have a significant ramp up (in housing), you have to have better macroeconomic conditions.”
Lowe’s earned $747 million, or 64 cents per share, for the period ended Aug. 3. That’s down from $830 million, or 64 cents per share, a year ago. Fiscal 2012 has one less week than last year. The timing shift lowered earnings by about 3 cents per share. Removing a charge tied to previously announced job cuts and the impact of the timing shift, earnings were 68 cents per share.
Revenue fell 2 percent to $14.25 billion from $14.54 billion. Lowe’s said that the timing shift accounted for 1.8 percentage points of the decline.
Analysts polled by FactSet expected earnings of 70 cents per share on revenue of $14.44 billion, on average.
For fiscal 2012, Lowe’s now expects earnings of about $1.64 per share and revenue to be about flat with 2011’s $50.21 billion. It previously predicted earnings of $1.73 to $1.83 per share, with revenue rising 1 percent to 2 percent. Wall Street foresees full-year earnings of $1.80 per share on revenue of $50.58 billion.
Lowe’s Cos. shares fell almost 6 percent, or $1.78 to $26.09 on Monday. Home Depot’s shares slipped 54 cents to $56.19.
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