Foolish Forecast: How Lowe's Can We Go?

Uncovering any good news from home-furnishings firms like La-Z-Boy (NYSE: LZB  ) , Hooker (Nasdaq: HOFT  ) , Ethan Allen (NYSE: ETH  ) , or any industry-related company seems about as easy as picking a needle out of a haystack these days.

As housing and retail investors continue to search in vain for a light at the end of the tunnel -- a tunnel currently road-blocked by a pile of foreclosure signs and dilapidated houses -- we can only hope for a hint of good news on Monday, when Lowe's (NYSE: LOW  ) reports its fiscal 2007 numbers. Here's how things are looking so far.

What analysts say:

  • Buy, sell, or waffle? Twenty-two analysts now follow Lowe's, up three from last quarter. Eleven of them rate Lowe's a buy, 10 more a hold, and one still says "sell."
  • Revenue. Wall Street expects to see quarterly sales rise 2% to $10.63 billion.
  • Earnings. Profits are predicted to fall 38% to $0.25 per share.

What management says:
Management took a table saw to guidance last quarter, predicting that Lowe's would end fiscal 2007 with somewhere between $1.83 and $1.87 per share. With $1.58 tucked under its tool belt already, that means Wall Street is expecting the worst from Monday's news. But here's the good news -- when updating his guidance last quarter, Lowe's CEO Robert Niblock said his guidance was already "appropriately conservative" given the "the ongoing housing correction, tighter credit standards in the mortgage market, and rising financial obligations." So, in theory at least, he's already baked all the negative factors into the guidance.

Long story short, if Lowe's disappoints next week, he'll be as surprised as you are.

What management does:
And yet, from the numbers I'm looking at, "surprise" may not be the appropriate reaction to any bad news on Monday. While gross margins continue to climb slowly at Lowe's, operating margins are starting to stumble, and with them, the bottom line. Lowe's is still beating Home Depot (NYSE: HD  ) by nearly a full percentage point on operating margins, but that could change.

Margins

8/06

11/06

2/07

5/07

8/07

11/07

Gross

34.3%

34.4%

34.5%

34.5%

34.8%

34.8%

Operating

11.2%

11.3%

11%

10.6%

10.7%

10.4%

Net

6.7%

6.7%

6.6%

6.4%

6.4%

6.2%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Year to date, the top line has risen 3.8%, with cost of goods sold trailing right behind, up 3.2%.

Where Lowe's runs into trouble is operating costs, which have outrun sales growth by a factor of two so far this year. That's what's squeezing the operating margins, and the net, at Lowe's.

But wait -- it gets worse. At last report, Lowe's balance sheet shows that, like operating costs, inventories have also grown nearly 8%, so again, twice the rate of sales growth. While 8% may not sound like much, the longer we see inventories grow at Lowe's, the more pressure management will come under to clear out slow-moving inventory by cutting prices.

And what happens when you cut prices? Gold star for you, Fool -- gross margins will fall as well.

What did we expect out of Lowe's last quarter, and what did we get? Find out in:


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