Lowe’s Results Show The Housing Recovery Is Slower Than We Had Hoped

LOW: Lowe's logo

Lowe’s (NYSE:LOW), the world’s second largest home improvement chain, reported its Q1 results on Monday with 8% higher sales and double digit (~14%) growth in net earnings. However, the stock tanked 10% the same day over lowered earnings outlook for the 2012 fiscal due to slowing demand. The company also lagged its bigger competitor Home Depot (NYSE:HD), that reported 28% higher net earnings and 3 percentage point higher growth in same store sales for the same quarter.

See our complete analysis of Lowe’s here

Lags Home Depot In Capitalizing On Warmer Winter Sales

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Even though Lowe’s capitalized on better than anticipated warmer winter sales during most of the quarter, its same store sales growth of 2.6% was much lower compared to 6% comps for Home Depot during the same quarter, making it the 12th straight quarter when it trailed Home Depot in same-store sales.

Lowe’s sales have also been subdued due to its strategy to move away from promotions and discounts on expensive items like appliances, and instead offer ‘everyday low prices’, that has yet to grab sufficient attention of the customers that are conditioned to look for discounts. Apart from the slowing seasonal demand towards April, Lowe’s continues to maintain a cautious view of the housing and macro demand environment, and has lowered its earnings forecast for modest growth in 2012, which sent its shares down nearly 10%. Lowe’s, which runs 1,747 stores in the U.S., Canada and Mexico, now expects total sales growth close to 1-2% with an increase of 1-3% in same store sales.

Weak Industry Outlook

Even though home improvement retailers Home Depot and Lowe’s posted sales and margin improvements last quarter, both missed heightened market expectations, sending the stocks lower after earnings. Both of the stocks had been initially priced for a recovery, which now seems to be happening more slowly than previously anticipated.

While the housing market has started to stabilize after years of weakness, the market is still lagging the general economic recovery. These factors have led to lowered outlook compared to previous expectations, prompting moderation in the home improvement retailers stock prices to reflect a more reasonable valuation for both companies.

We are in the process of revising our $31 Trefis price estimate for Lowe’s stock.