May 21, 2012 / 2:03 PM / 6 years ago

Lowe's cuts profit outlook as demand weakens

(Reuters) - Lowe’s Cos Inc (LOW.N), the world’s No. 2 home improvement chain, cut its fiscal-year earnings outlook and said demand slowed toward the end of the traditionally strong first quarter, sending its shares down nearly 10 percent.

The lackluster forecast came just days after larger rival Home Depot Inc (HD.N) missed Wall Street’s quarterly sales estimates as demand weakened in April following a jump in home improvement projects earlier in the year because of a warm winter.

“While we capitalized on better-than-anticipated weather during most of the quarter, demand for seasonal products slowed toward the end,” Lowe’s CEO Robert Niblock said on Monday.

In addition to demand being pulled forward, April sales were hurt by Lowe’s decision to offer fewer discounts on expensive items like appliances. That is in sync with the retailer’s bigger plan to move away from promotions to offering everyday low prices.

“Clearly there will be some disruption in the process of going to this strategy,” Niblock told Reuters. “Consumers are conditioned to look for a discount.”

Niblock sees the disruption as temporary and expects more shoppers to come into stores once it establishes itself as a retailer offering competitive prices.

Lowe’s will still offer discounts during key seasons and give additional discounts to shoppers using Lowe’s credit cards.

Sales at Lowe’s stores open at least a year rose 2.6 percent, including a 2.7 percent increase for the U.S. business, making it the 12th straight quarter when it trailed Home Depot Inc (HD.N) in same-store sales.

The results from both home improvement chains also reflected the state of the housing market, analysts said.

While the housing market has started stabilizing after years of weakness, “things are not terrific in this space,” analyst Alan Rifkin at Barclays said.

The 2.6 percent rise in same-store sales also fell short of many analysts’ estimates. Rifkin was looking for a 4 percent increase.

Lowe’s shares slid about 10 percent to $25.70, while Home Depot shares recovered from earlier losses to trade up 1 percent at $47.53 on Monday.

Spring is traditionally the biggest selling season of the year for home improvement chains. But this year, homeowners stepped out earlier than usual to take advantage of the unseasonably warm winter weather across the United States.

Lowe‘s, which maintained a “cautious view of the housing and macro demand environment,” sees earnings of $1.73 to $1.83 a share for the year ending February 1. It earlier forecast $1.75 to $1.85 a share.

    Goldman Sachs analyst Matthew Fassler called Lowe’s outlook “disappointing,” especially since the company exceeded profit estimates in the first quarter.

    “My biggest concern about the sector is the underlying demand dynamics,” Fassler said. He has a “buy” rating on Lowe’s and a “neutral” rating on Home Depot.

    Rifkin said he preferred Home Depot over Lowe‘s, citing the larger rival’s efforts to control costs.

    STORE-LEVEL CHANGES

    Lowe’s sales rose 7.9 percent to $13.15 billion in the first quarter ended May 4, while analysts, on average, expected $12.99 billion, according to Thomson Reuters I/B/E/S.

    Net earnings rose to $527 million, or 43 cents a share, from $461 million, or 34 cents a share, a year earlier. Excluding a charge for a previously announced cut in U.S. headquarters staff, the retailer earned 44 cents per share, compared with Wall Street’s estimate of 42 cents.

    Lowe‘s, which runs 1,747 stores in the U.S., Canada and Mexico, continues to expect total sales to rise 1 percent to 2 percent for the fiscal year, with an increase of 1 percent to 3 percent in sales at stores open at least a year.

    Reporting By Dhanya Skariachan; editing by Dan Lalor, Lisa Von Ahn and Jeffrey Benkoe

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