Foolish Forecast: Lowe's Lowdown

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October has always been a month associated with horror. (Thanks, Halloween.) A couple of weeks ago, home-furnishings manufacturers Fortune Brands (NYSE: FO) and Masco (NYSE: MAS) showed us that the month's bad rap was entirely deserved. (Thanks, lousy earnings.)

In contrast, November is the Thanksgiving month. We'll learn whether that rep is deserved when one of Fortune Brands' and Masco's customers, Lowe's (NYSE: LOW), reports its Q3 2008 earnings on Monday. (An epilogue is due out a week later from another Lowe's supplier, American Woodmark (Nasdaq: AMWD).) Here's a preview of what to expect over the next few days.

What analysts say:

• Buy, sell, or waffle? Twenty-five analysts give Lowe's 12 buy ratings, eight holds, and five sells.
• Revenue. Surprise, surprise -- Wall Street expects sales to rise! Only 0.5%, but still -- that would make for sales of $11.62 billion.
• Earnings. No such luck for profits. Analysts predict a 35% drop, to $0.28 per share.

What management says:
Updating investors in September, CFO Robert Hull predicted that by year's end, we will see Lowe's deliver 1% total sales growth, despite 6% or worse deterioration in same-store sales. How? By building enough new stores to increase total square footage by more than 7%. Operating margins on those sales are expected to drop 180 basis points year over year, eventually producing net profit of about $1.52 per share.

Interestingly, Lowe's likewise sees earnings of about $1.52 per share next year, despite anticipating that sales growth will perk back up to about 4%. In other words, profit margins should continue to slide for several more quarters.

What management does:
So far, so bad -- that's exactly what profit margins have done over the last several quarters, too. Each of the rolling gross, operating, and net margin levels has been dropping steadily for more than a year. (Nonetheless, on the bright side, Lowe's still eclipses Home Depot (NYSE: HD) on operating margin, and Sears (Nasdaq: SHLD) is way, way behind in this race.)

Margins	5/07	8/07	11/07	2/08	5/08	8/08
Gross	34.5%	34.8%	34.8%	34.6%	34.6%	34.5%
Operating	10.6%	10.7%	10.4%	9.8%	9.4%	9.1%
Net	6.4%	6.4%	6.2%	5.8%	5.6%	5.4%

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:
Yet Lowe's CEO Robert Niblock still believes his firm can "more than double our expected 2008 earnings per share over the next five years, generating significant free cash flow." Um ... how?

Management answers in two parts. First: "Our goal is to prudently manage expenses and identify opportunities to drive efficiencies." In other words, Lowe's wants to control operating costs enough to hold the bottom line as steady as possible, whatever happens to gross margins. Second: "Capture profitable market share." In the retail game, this generally requires keeping prices low while maintaining customer-service standards.

Seems to me that these two efforts may be working at cross-purposes, but you can't fault Lowe's intentions. As for how well it delivered on them in Q3, we'll find out on the other side of the weekend.

Get more lowdown on Lowe's in:

• This Just In: Upgrades and Downgrades
• Lowe's Lowers Expectations
• Rebuilding at Home Improvement Stores?