Handyman's helper Lowe's (NYSE:LOW) reports Q4 and full-year 2006 earnings results Friday morning. Want to know what Wall Street expects to see? Read on. Want to know what really matters? Read on a bit more.

What analysts say:

  • Buy, sell, or waffle? Twenty-three analysts follow Lowe's, which garners 13 buy ratings, nine holds, and a single sell.
  • Revenues. Wall Street expects to see a 4% drop in quarterly sales to $10.36 billion.
  • Earnings. Profits, too, are predicted to plunge -- down 16% to $0.37 per share.

What management says:
Sales growth slowed significantly for Lowe's last quarter, a fact that CEO Robert Niblock blamed on a confluence of factors: "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." Even so, Niblock was able to boast of gaining market share and argued that his stores had put in a "solid performance" for the quarter.

Looking forward, however, Niblock saw continued rough going. He predicted "external headwinds" (as opposed to malodorous internal winds, one supposes) through the end of fiscal 2006 and the first half of fiscal 2007. In Friday's news in particular, Niblock advised investors to expect declines of at least 4% in both total and same-store sales, weaker operating margins, and $0.36 to $0.38 per share in net profits. (Yet for all that, fellow Fool Ryan Fuhrmann still thinks Lowe's is a buy. Find out why when you read his Q3 write-up.)

What management does:
Now about those operating margins ... If they do end up declining 150 to 160 basis points, as Niblock predicted, this will stand in marked contrast to last quarter's results, when the company missed earnings estimates, but posted stronger operating margins than in the previous year's third quarter. In fact, on a rolling basis, operating margins have continued climbing in every quarter for the past 18 months; rolling gross and net margins have done so as well. Friday's news may break that trend.

Margins

7/05

10/05

2/06

5/06

8/06

11/06

Gross

34.0%

34.0%

34.2%

34.4%

34.3%

34.4%

Operating

10.7%

10.8%

10.8%

11.2%

11.2%

11.3%

Net

6.2%

6.3%

6.4%

6.7%

6.7%

6.7%
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:
When a retailer warns of "headwinds" and other meteorological, metaphorical problems with customer demand, investors need to pay special attention to what's going on with the balance sheet. Specifically, is the firm keeping its inventories in check? Or, even better, is it selling them down ahead of the storm, so as to avert future pressure to discount its wares to keep moving them off the shelves and into customers' shopping carts?

In this regard, I see a potential tempest brewing at Lowe's. Over the last couple of quarters, the firm has bucked the housing market's malaise and kept its own sales growing -- up 9% year over year on average. But back at the warehouse, inventories grew even faster -- up 11%. It appears that Lowe's recognizes the problem, as inventories were essentially flat sequentially between Q3 and Q2. Still, sales declined 16% sequentially between those two quarters. We'll be hoping to see even more progress on this tomorrow.

Competitors:

  • Builder's FirstSource (NASDAQ:BLDR)
  • Costco (NASDAQ:COST)
  • Home Depot (NYSE:HD)
  • Sears (NASDAQ:SHLD)
  • Snap-On (NYSE:SNA)
  • US Home Systems (NASDAQ:USHS)

For more Foolishness on Lowe's and its archrival, read:

Home Depot is a Motley Fool Inside Value recommendation, Costco is a Stock Advisor recommendation, and Snap-On is a Motley Fool Income Investor recommendation. Try any one of our investing services free for 30 days.

Fool contributor Rich Smith does not own shares of any company named above. The Fool's disclosure policy is much smarter than a bag of hammers.