Lowe's curbs expansion as consumers pull back

BANGALORE Mon Aug 17, 2009 3:27pm EDT

A contractor loads a bathroom vanity cabinet onto his truck after purchasing it at a Lowe's store in Burbank, August 17, 2009. REUTERS/Fred Prouser

A contractor loads a bathroom vanity cabinet onto his truck after purchasing it at a Lowe's store in Burbank, August 17, 2009.

Credit: Reuters/Fred Prouser

BANGALORE (Reuters) - Lowe's Cos, the No. 2 U.S. home improvement chain, curbed its expansion plans and forecast worse-than-expected results in the third quarter as recession-weary consumers put off big renovations, sending its shares down more than 11 percent.

The forecast dragged down shares of industry leader Home Depot, which reports its quarterly results on Tuesday.

Lowe's, which posted a 19 percent drop in quarterly profit on Monday, blamed weak demand for its decision to scale back North American store expansion plans. It will walk away from a number of future store projects too, the company said.

"I think it's the right decision... this industry does not need more capacity," said Stifel Nicolaus analyst David Schick.

Lowe's said it will provide more details on its expansion plans at its analyst conference next month.

Lowe's plans to open 62 to 66 stores in 2009. It previously said it would open 60 to 70. It expects to open 35 to 45 stores in 2010, fewer than it had anticipated.

"The decision to cut bait on several projects is an acknowledgment of the challenging environment that is likely to persist for some time," JP Morgan analyst Christopher Horvers said in a note.

Sales at home-improvement chains have tumbled as people save money by buying fewer things that they do not need.

Although the housing market and economy are showing signs of bottoming out, Lowe's Chief Executive Robert Niblock said he sees consumers remaining under pressure for now.

"Significant headwinds remain including the pressures of the economic backdrop and cycling last year's hurricane spending along the Gulf Coast," Niblock said.

Lowe's and Home Depot shares will stay under pressure as investors abandon their expectations for improving sales in the second half of the year, but margin trends at both retailers are strong, said Credit Suisse analyst Gary Balter.

"We believe that both Lowe's and Home Depot are well positioned for an eventual bottoming in housing," he said.

Schick, who has a "buy" rating on Home Depot and Lowe's, called Lowe's outlook "somewhat conservative" and said the company was entering "less bad housing headwinds" and getting better by taking a tougher look at operations.

He has a "buy" rating on Home Depot and Lowe's.

Schick said he expects Home Depot's numbers to look "less bad" on Tuesday citing improvements at its business in certain regions, especially California.

"Home Depot has been at the slower growth game longer, allowing for even better inventory controls and productivity tweaks to the operating model," he added.

Earlier this year, Lowe's raised its full-year forecast after seeing signs that the worst of the U.S. housing slump might have passed. Home Depot did the same in June.

New U.S. housing starts and permits jumped in June, suggesting that the battered housing sector was beginning to stabilize, a government report showed in July.

While sales of expensive goods suffer, both chains have done well with products for outdoor, "do-it-yourself" projects like landscaping and painting.

BAD WEATHER, WEAK ECONOMY

In the second quarter, which ended on July 31, Lowe's said it earned $759 million, or 51 cents a share, down from $938 million, or 63 cents a share, a year earlier.

Excluding a charge of $48 million related mainly to the projects that Lowe's no longer plans to pursue, profit was 54 cents a share, in line with the analysts' average forecast, according to Reuters Estimates.

Wavering consumer confidence and an unseasonably cool, wet summer in key markets, especially in the Northeast, restrained customer spending and hurt sales, Niblock said.

Sales at Lowe's fell 4.6 percent to $13.8 billion. Sales at stores open at least a year, an important retail measure, fell 9.5 percent.

For the third quarter, Lowe's forecast earnings of 21 cents to 25 cents a share, while analysts had expected 27 cents.

The Mooresville, North Carolina, company said it expected sales to fall 2 percent to 5 percent, and same-store sales to fall 6 percent to 10 percent.

Lowe's shares were down 11 percent at $20.30 on the New York Stock Exchange, while Home Depot fell 4 percent to $26.05.

(Reporting by Dhanya Skariachan in Bangalore; Editing by Lisa Von Ahn and Robert MacMillan)