Lowe's Record Earnings Betray Weak Housing Market
Lowe's Cos. Inc. avoided joining the home-building industry's walking wounded this morning, reporting record earnings for the quarter and beating some of Wall Street's expectations. But the world's second-largest home improvement chain retailer, behind only Home Depot, still showed some vulnerability to a wobbly housing market.
Lowe's reported net earnings of $716 million. The figure was up 10.8 percent over a year ago, with earnings per share of 46 cents, ahead of the 43 cents expected by Wall Street.
Total sales for the quarter just reported increased 5.8 percent to $11.2 billion, a jump from last year's $10.6 billion but slightly below the $11.49 billion hoped for by Wall Street.
Turbulent Times Ahead?
While the company dodged the bullet that hit Home Depot last week, when the giant of home-improvement retail–widely considered to be one of the bellwethers of the housing market–reported a 3 percent drop in profits and cut its full-year sales and profit forecasts, Lowe's, too, seemed to be on the brink of a turbulent fourth quarter. The company said it expected earnings of 36 to 38 cents per share in the months ahead, well below analysts' forecasts of 41 cents a share. Same-store sales, which declined 4 percent this quarter, are expected to drop an additional 4 to 6 percent. Operating margins are expected to decline 150 basis points.
"The combined effects of a slowing housing market in parts of the U.S., significant deflation in certain commodity categories, and a difficult comparison to last year's hurricane recovery and rebuilding efforts have created a challenging sales environment for home improvement," Robert A. Niblock, Lowe's chairman, president, and CEO, said in a release. "We believe many external headwinds will exist through the balance of the year and the first half of fiscal 2007, but as we look to the future, we are confident that solid longer-term drivers of our industry remain."
During housing downturns in the past, the home improvement stores have argued that they would ride out the turbulence better than the rest of the industry, since customers who were not inclined to buy new houses were more likely to remodel their existing homes. But in the wake of Lowe's announcement, it seemed apparent that this housing slump may be different, with some analysts speculating that the slow deflation of the housing bubble may hurt Wall Street's usual year-end rally.
Housing Starts Down
For home builders, at least, there certainly seems to be room for concern. The Commerce Department announced last week that housing starts fell 14.6 percent in October, reaching a six-year low, while building permits also tumbled 6.3 percent. Both declines seemed to surprise Wall Street, which had expected a 4.5 percent drop in starts and negligible movement in permits. And while there were bright spots in some parts of the country–the Northeast saw a 31 percent jump in starts–the overall trend was negative. In the South, starts declined a whopping 26.4 percent, the largest drop in 22 years. Nationwide, housing starts are down 27.5 percent since October 2005, with building permits down 28 percent.
As the industry scrambles to scale down bloated inventories and slow the pace of home construction, there are indications that the worst of the slump has passed. Last week, the National Association of Home Builders found in its most recent survey that home-builder sentiment was actually improving for the first time in eight months. The housing market index bumped up to 33 this month, from 31 in October. The group called it "the light at the end of the tunnel."
Still, those numbers are a long way from the index's peak of 72 last summer. And they reflect a gloomy reality in the short term: Only 1 in 3 builders is now optimistic about the housing market.
Through this morning, Lowe's was down less than 1 percent, at $30.48. Home Depot was up just over 1 percent.
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