Lowe's raises outlook as housing rebound boosts sales

An employee helps a customer shop for a sander at a Lowe's home improvement store in Chicago, Illinois
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Lowe's reported slightly lower-than-expected quarterly earnings and gave a disappointing fiscal-year outlook, underscoring the No. 2 home improvement retailer's struggle to catch up with market leader Home Depot.

Wednesday's news came the day after strong results from Home Depot, which increased its forecast for the year for the third time in three quarters as rising housing prices encouraged more people to invest in their homes.

(Read more: Home Depot raises outlook again after strong quarter)

Lowe's results also made some analysts wonder if rising interest rates would take some steam out of the recent housing market rebound that has encouraged homeowners to take up more expensive remodeling projects.

"In addition to missing earnings-per-share estimates, interest rates are rising and housing is slowing, calling into question continued outperformance in this space in 2014," Janney Capital Markets analyst David Strasser said.

After the earnings announcement, the company's shares fell in pre-market trading. (Click here to get the latest quotes.)

Home Depot raises year EPS guidance

On a conference call, Lowe's executives said discretionary spending on larger home projects was still far below pre-recession peaks. They also said competition in the appliance market had eaten into the company's gross margin.

Even though Lowe's issued an outlook below analysts' estimates, Chief Executive Officer Robert Niblock said the home improvement industry was poised for growth this quarter and for "further acceleration" in the next fiscal year.

Lowe's, once a Wall Street darling, is not just a victim of the vagaries in the housing market. It was slower than Home Depot to cut costs during the most recent U.S. recession.

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Some analysts also say Home Depot will continue to outperform Lowe's on the sales front for a while, in part because it derives much more revenue from the key contractor and professional customer group.

These customers account for 35 percent of Home Depot's sales, compared with 25 percent at Lowe's. Some analysts say it is hard to close that gap quickly because Home Depot has more stores than Lowe's in major metropolitan areas, where many of the professional contractors are based.

Fight for market share

Sales at Lowe's stores open at least a year rose 6.2 percent in the third quarter ended Nov. 1. It was the 18th straight quarter that the company posted weaker same-store sales than Home Depot.

In recent years, Home Depot has benefited from efforts to improve customer service and win shoppers with more compelling prices than its rivals. It has tailored its marketing to local areas, centralized distribution centers and shifted more workers to jobs where they serve shoppers directly.

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After losing share to Home Depot for several quarters, Lowe's laid out a turnaround plan, offering everyday low prices and products targeted to specific geographic markets.

Lowe's also 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.

For the fiscal year ending Jan. 31, Lowe's raised its earnings forecast to about $2.15 a share from $2.10. However, the new outlook fell short of the analysts' average estimate of $2.19, according to Thomson Reuters I/B/E/S.

The retailer also increased its outlook for sales growth for the year to about 6 percent from 5 percent.

Net earnings in the third quarter rose to $499 million, or 47 cents a share, from $396 million, or 35 cents a share, a year earlier. Analysts were expecting 48 cents a share.

Sales increased 7.3 percent to $12.96 billion, topping the analysts' average estimate of $12.72 billion.

By Reuters