No. 2 U.S. home improvement chain Lowe's lost bargain-hungry shoppers to larger rival Home Depot over the holidays as it held the line on discounts at the start of the key selling season.
Lowe's Cos. Inc., which did not promote appliances as aggressively as Home Depot Inc., reported weaker same-store sales versus its rival and issued a quarterly profit forecast that could miss analyst expectations.
"Home Depot has been more aggressive lately in its efforts to capitalize upon episodic spikes in consumer spending," Oppenheimer analyst Brian Nagel said.
The Lowe's forecast overshadowed the company's higher-than-expected fourth-quarter results and came a day after Home Depot reported strong results and raised its profit forecast for the year.
Lowe's now expects first-quarter earnings of 34 cents to 38 cents a share, while analysts' average estimate was 38 cents. It expects comparable-store sales to be about flat and operating margin to slide 0.1 to 0.2 percentage point.
The lackluster forecast came on the same day the National Association of Realtors indicated that sales of previously owned U.S. homes rose unexpectedly in January, but prices fell to their lowest level in nearly nine years. Shares of both Loew's and Home Depot fell on Wednesday.
"Fewer homeowners feel the economy will get worse before it gets better, but the number of homeowners who feel the recession is not over remains high," Lowe's Chief Executive Robert Niblock said on a call with analysts.
"As we look to 2011 it appears that unemployment is stabilizing and, while certain housing market indicators appear to be headed in the right direction, home prices are still a hurdle," Niblock said.
Lowe's said comparable-store sales, or sales at stores open at least a year, rose 1.1 percent in the fourth quarter. By contrast, comparable-store sales at Home Depot rose 3.9 percent globally and 4.8 percent in the United States.
"This represents the widest comp gap in favor of Home Depot since 2000," JPMorgan analyst Christopher Horvers said.
While appliances were a key driver of same-store sales at Home Depot, they were a drag on sales at Lowe's, Janney Capital Markets analyst David Strasser said.
He sees the appliance business remaining under pressure, at least in the first half of 2011, amid a still sluggish housing market and tough comparisons due to significant stimulus a year ago in the form of government cash for appliance clunkers and the housing tax credit.
In an interview with Reuters, Niblock said he sees more sales strength in the second half of 2011 versus first half, echoing comments from Home Depot.
Lowe's tried to reassure investors by listing an array of initiatives to boost margins, such as offering more private-label goods and installing new inventory management software to help individual stores keep better track of prices.
The company has also been making structural changes to become more competitive on prices at the local level.
TROUBLE AT THE TOP?
Some analysts also raised questions about leadership at Lowe's following recent changes, including the planned retirement of Chief Operating Officer Larry Stone this spring. The company does not intend to replace Stone.
"Home Depot is simply out-executing and as such merits a higher valuation," Horvers said, adding, "Lowe's recent management turnover and lagging comps are likely to fuel questions surrounding strategic direction."
Lowe's, which recently laid off about 1,700 middle managers across the United States, said net income rose to $285 million, or 21 cents a share, in the fourth quarter from $205 million, or 14 cents a share, a year ago. Analysts were expecting 18 cents a share, according to Thomson Reuters I/B/E/S.
Sales rose 3.1 percent to $10.48 billion, above analysts' average estimate of $10.45 billion.
Lowe's shares were down 2.3 percent to $25.40 in midday trade, while Home Depot was off 2.5 percent to $37.13.
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