Lowe's Sticks to Outlook - Analyst Blog

Lowe's Companies Inc. (LOW), the world's second largest home improvement retailer, reaffirmed its fiscal 2010 outlook, and said that during its annual conference, it would highlight the strategic initiatives to be undertaken to stay afloat amid unpredictable housing market and dwindling consumer environment, coupled with unemployment woes.

Management notified that the company's growth prospects are not solely dependent upon the improvement in the housing environment. It plans to manage its operations effectively to accelerate profit growth vis-à-vis sales growth, thereby improving its return on investment. 

Lowe's, which competes with The Home Depot Inc. (HD), said it continues to expect fiscal 2010 earnings between $1.37 and $1.40. The current Zacks Consensus Estimate of $1.40 remains in sync with the company's high end of the guidance range.

Management reiterated that it expects sales to increase between 3% and 4%, and comparable-store sales between 1% and 2% in fiscal 2010. Lowe's, which currently operates more than 1,725 stores, also reaffirmed its plan of opening 42 stores during the fiscal year. 

We appreciate its approach of cutting new store growth targets in the current consumer environment. The company had opened 62 stores in 2009, significantly down from 115 stores opened in 2008 and 149 stores opened in 2007.

Lowe's had recently posted third-quarter 2010 results. The quarterly earnings of 31 cents a share came a penny ahead of the Zacks Consensus Estimate, and rose 34.8% from 23 cents delivered in the prior-year quarter on the heels of better expense management and a higher gross margin. Net sales for the quarter rose 1.9% to $11,587 million, which missed the Zacks Consensus Revenue Estimate of $11,798 million.

We believe that the company is rationalizing its capital expenditures, including store-remerchandising efforts, to improve its return on invested capital. Given that spending on big remodeling projects will likely remain under pressure until the housing market stabilizes, inventory levels normalize and consumer-spending rebounds, we believe Lowe's will focus more on cost containment and improving margins to sustain its bottom-line growth.

Currently, we have a Neutral rating on Lowe's. The Zacks #3 Rank, which translates into a short-term ‘Hold' recommendation, also correlates with our long-term view.

 
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