Lowe's Earnings Buildout (News) August 16, 1999

Lowe's Earnings Buildout

By Louis Corrigan (TMF Seymor)
August 16, 1999

Less than a week ago, fears that rising interest rates might dampen consumers' enthusiasm for fixing up their homes had caused shares of major home improvement retailers Home Depot (NYSE: HD) and Lowe's (NYSE: LOW) to trade 23% and 35% off their respective all-time highs. But the worries have yet to show up in these market leaders' actual results.

Last Thursday morning, Home Depot said it would deliver Q2 earnings tomorrow of $0.44 per share, up 42% from last year's $0.31 per share and easily surpassing the consensus estimate of $0.39 per share. Sales soared 28% to $10.4 billion on the strength of an 11% same-store sales gain. Home Depot shares bounced to close the week 18% above Tuesday's low, with the good news helping Lowe's rally for a 15% rebound from its recent low.

Today, Lowe's is trying to return the favor with its own better-than-expected Q2 results. The retailer, which completed its pooling of interest acquisition of Eagle Hardware and Garden in April, hammered home a sales gain of 19% to $4.4 billion, in line with the 19% expansion in retail square footage. Comp-store sales (those open at least 14 months) increased 5.6%. Sales of appliances, home decor and live nursery items were particularly strong, reflecting a continued national boom in sales of existing homes and the redecorating that often follows such purchases.

Net income increased 27% to $230.2 million, good for a 25% gain in earnings per share (EPS) to $0.60 from $0.48 a year ago. The Street had been expecting $0.58 per share. Year-to-date, Lowe's has nailed down a 19% sales gain to $8.2 billion while EPS has risen 29% to $0.97 per share, excluding a $0.04 acquisition charge.

Based in Wilkesboro, North Carolina, Lowe's now operates 533 stores in 37 states compared to 850 total Home Depot stores. Most important, Lowe's continues to add to its base of large stores (over 100,000 square feet), solidifying its position as the undisputed number two player in a booming sector that will have only two major long-term survivors. Its large stores now make up 82% of its store base versus 71% a year ago. That's good because the large stores are more profitable. For example, while large stores open for at least 14 months (the comp base) represented just 62% of total units at the end of Q2, this group conducted 68% of total sales and generated 74% of the company's total operating income.

You see this leverage in the major lines of the Q2 income statement. Gross margins improved to 26.77% from 26.51%. Selling, general and administrative (SG&A) expenses fell to 15.89% of sales from 16.13%. Despite a jump in the income tax provision to 29.98 of revenues from 27.55%, net profit margins expanded. Moreover, the company's balance sheet remains strong, despite its aggressive growth. Short-term cash and investments have risen 58% in the last year to $1,025 million while long-term debt has increased by just 17% to $1,747 million. Inventories are in line with gains in square footage and sales.

Still, the market remains jittery about tomorrow's Consumer Price Index and next week's Fed meeting. That perhaps explains why this morning Lowe's was off $1 7/16 to $48 1/2.

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