Lowe's vows fight as analysts favor Home Depot

Mon Nov 14, 2011 1:05pm EST

The Lowe's logo is seen in Westminster, Colorado May 16, 2011. REUTERS/Rick Wilking

The Lowe's logo is seen in Westminster, Colorado May 16, 2011.

Credit: Reuters/Rick Wilking

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(Reuters) - Lowe's Cos Inc (LOW.N) reported better-than-expected quarterly results and laid out a blueprint to win back shoppers from larger rival Home Depot Inc (HD.N), even as skeptics said they saw little chances of a fast turnaround at the smaller home improvement chain.

From stepping up efforts to attract online shoppers to slashing prices permanently, Lowe's is reworking its strategy to outdo the market leader.

"We believe that through kind of the first part of 2012, we start to make up some ground and you start to see maybe us closing that gap in the second half of 2012," CEO Robert Niblock told Reuters in a telephone interview.

Lowe's, a victim of the weak economy and housing market, has been slower to cut costs than Home Depot, whose sales at stores open a year or more have beaten its rival's for nine straight quarters.

In the third quarter, Lowe's same-store sales performance was lackluster and below some analysts' estimates. Sales at stores open at least a year rose just 0.7 percent. Analyst Alan Rifkin at Barclays was looking for a 1 percent increase.

Demand for expensive renovations is still weak, Niblock said.

"For big-ticket categories to become really healthy, primarily we need home prices to start appreciating," he said, adding that U.S. consumers still have a "fragile mindset" due to high unemployment and economic uncertainty.

Home Depot is due to report its quarterly results on Tuesday. Analysts across the board expect the market leader to outperform Lowe's as it stands to benefit from recent moves to improve its distribution and customer service and cut costs.

"They have been feeding share to Home Depot," Rifkin said of Lowe's. A recent move to offer low prices permanently rather than temporary discounts has helped Lowe's sales a little but hurt margins, he added.

"We do prefer Home Depot over Lowe's," Rifkin said.

Others agreed.

"There is still room for Home Depot to outperform relative to Lowe's heading into 2012. What Lowe's needs to do is take a hard look at their merchandising, their supply chain, their operations in order to flip that back into their favor," Morningstar analyst Peter Wahlstrom said.

On Monday, Niblock said he sees more room to cut costs.

Lowe's shares were up 2 percent at $23.58 in afternoon trade on the New York Stock Exchange.

FIGHTING BACK

Lowe's recently revamped its management and regional structure in an attempt to improve its U.S. operations.

Its U.S. stores now operate under three divisions -- North, South and West. Previously, it divided its largest market into at least five regions. The chain also consolidated its merchandising operations into two product units from four.

Last month, Lowe's said it was closing 20 of its U.S. locations and eliminating nearly 2,000 jobs, and slashing its store-opening plans to improve profitability. It laid off about 1,700 middle managers across the United States in January.

The company nudged its fiscal 2011 sales growth forecast higher, to a range of 2 percent to 3 percent from its August forecast of 2 percent.

Lowe's said net income fell to $225 million, or 18 cents a share, in the third quarter ended October 28, from $404 million, or 29 cents a share, a year earlier.

Excluding charges related to store closings and discontinued projects, it earned 35 cents a share, beating analysts' average estimate of 33 cents a share, according to Thomson Reuters I/B/E/S.

Sales rose 2.3 percent to $11.85 billion, while analysts expected $11.69 billion.

It expects full-year profit of $1.37 to $1.40 a share, including charges of 20 cents a share associated with store closings and discontinued projects.

"Although Lowe's benefits from a relatively attractive valuation, we see limited upside potential from current levels based on our view of likely continued same-store sales underperformance vs. principal competitor Home Depot," Citigroup analyst Kate McShane wrote.

(Reporting Dhanya Skariachan in New York; additional reporting by Nivedita Bhattacharjee in Bangalore; Editing by Saumyadeb Chakrabarty, Dave Zimmerman and John Wallace)

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