Lowe's margin outlook disappoints; turnaround questioned

Mon Feb 25, 2013 2:27pm EST

A specially designated parking spot for Lowes.com shoppers is pictured in the parking lot at the Lowe's Home Improvement Warehouse in Burbank, California August 15,2011. REUTERS/Fred Prouser

A specially designated parking spot for Lowes.com shoppers is pictured in the parking lot at the Lowe's Home Improvement Warehouse in Burbank, California August 15,2011.

Credit: Reuters/Fred Prouser

(Reuters) - Lowe's Cos Inc's (LOW.N) forecast a fiscal-year operating margin on Monday that analysts said did little to boost confidence in the U.S. housing market or the retailer's own turnaround.

The news overshadowed stronger-than-expected quarterly results and caused some on Wall Street to worry that investors in the second-largest home improvement chain might have to wait longer than they had anticipated to see Lowe's catch up with larger rival Home Depot Inc (HD.N).

Morningstar analyst Peter Wahlstrom said Lowe's outlook for an operating margin rise of about 60 basis points in the current fiscal year was "ho-hum."

"That basically means that investors need to wait another year for maybe the Lowe's outperformance story to take hold," he said. "People were hoping for that to come in 2013."

Home Depot plans to report results on Tuesday, and most analysts expect the industry leader's same-store sales to outpace those from Lowe's for the 15th straight quarter.

Lowe's shares were down 1.8 percent at $37 in afternoon trading, while Home Depot fell 0.2 percent to $65.46.

Citi analyst Kate McShane said Lowe's outlook might be conservative, given that the company expects meaningful same-store sales and gross margin benefits by the second half. Still, she maintained her "neutral" rating on the stock, citing Lowe's underperformance against Home Depot and a choppy economy.

"The lack of incremental visibility on the company's progress against key initiatives keeps us on the sidelines," McShane added.

HOUSING

Lowe's said it expected its fiscal-year sales to rise about 4 percent from $50.52 billion in the year ended on February 1.

While "home value perception" ratings are the strongest they have been in four years, tight credit conditions and high mortgage delinquencies will restrain the speed at which housing and, therefore, the home improvement industry can grow, Lowe's Chief Executive Officer Robert Niblock told investors.

The housing market has shown some signs of recovery from a collapse that helped push the economy into its worst recession since the Great Depression. Homebuilding added to national economic growth in 2012 for the first time since 2005 and is expected to provide more support this year.

"While we see a modest recovery in housing, we see rising interest rates as a threat to home refinancing, a key driver of remodeling," S&P Capital IQ analyst Michael Souers said.

MAKEOVER

In its fourth quarter, Lowe's benefited from rebuilding after Hurricane Sandy and the retailer's efforts to improve product selection and customer service.

As part of its makeover, the company has started offering everyday low prices and products targeted to specific geographic markets. It made its stores more appealing with improved signs, television displays that stream videos on how-to-do projects, and lower racks to make items easier to reach.

Lowe's has also increased its assortment of products available online and started mylowes.com, a site that allows shoppers to save their room dimensions, create a shopping list and set reminders to buy items such as air filters and batteries for smoke alarms.

Net income was $288 million, or 26 cents a share, in the fourth quarter, compared with $322 million, or 26 cents a share, a year earlier. Analysts on average were expecting a profit of 23 cents a share, according to Thomson Reuters I/B/E/S.

Sales fell 5 percent to $11.05 billion, but exceeded the analysts' average estimate of $10.84 billion.

Sales at stores open at least a year rose 1.9 percent both globally and in the United States. Sandy made landfall five days before the start of Lowe's fourth quarter and boosted same-store sales by about 70 basis points.

The company forecast a 3.5 percent increase in fiscal-year same-store sales. It expects earnings of $2.05 a share for the period.

(Reporting by Dhanya Skariachan; Editing by Lisa Von Ahn)