Lowe’s Ebb: Same Stores Cede 7% in ‘08, More in ‘09
From PROSALES ONLINE, By Craig Webb: DYI consumers and “prosumers” powered the explosion of hybrid building materials, hardware, home appliance, and home and garden supplies super stores through the latter part of this decade. Now, the triple-threat of job losses, household balance sheet deleveraging, and choking commercial credit has cut off important oxygen supplies to both longstanding No. 1 player Home Depot and its feisty rival Lowe’s.
ProSales magazine and online editor Craig Webb reports on Lowe’s reel of fortune, both a 60% year on year earnings decline, and a sharply challenged 2009 outlook.
Lowe’s Companies Inc. today reported its sales at stores open at least a year fell 7.2% in fiscal year 2008, ended Jan. 30, and predicted same-store sales will drop another 4% to 8% over the next 12 months. The company also said it will open just over half as many stores in the coming year as in 2008.
Net earnings for the fiscal fourth quarter ended Jan. 30 sank 60.3% from the year-earlier period to $162 million on a 3.8% drop in revenue to $9.98 billion. Net earnings for the fiscal year shrank 21.9% to $2.2 billion on a drop of just 0.1% in sales to $48.2 billion. Those sales numbers were boosted by the addition of 115 stores last year; as of Jan. 30, Lowe’s operated 1,649 stores in the United States and Canada.
Tuning into the company’s conference call with analysts, ProSales editor Webb reported Lowe’s senior strategists’ read on whys and wherefores of the sales swan dive and continued challenges. In short, consumers are simply shying away from the big bills that come with major home improvement undertakings right now. They’ll only do what they have to to keep their homes secure from heavy weather, financial or meteorological.
Larry Stone, President/COO of Lowe's
Larry Stone, Lowe’s president and chief operating officer, told analysts during a conference call that one reason why sales fell was that customers were doing fewer big-ticket renovation projects, such as kitchen projects. Similarly, Lowe’s revenue for installed sales projects, such as carpet and window installations, declined 14.4% in the fourth quarter from the previous year and was down 6% for the year. Discretionary expenditures accounted in 2006 for 45% of sales, he said. Now, they account for about one-third of sales. “[Customers are] hesitant to invest in large projects,” he said.
On the other hand, hurricanes and storms spurred purchases of shingles and other building materials. Had those purchases not occurred, the sales totals would have been one percentage point worse.
For those in dire need of a silver lining, look east, Stephen East, that is, Pali Research’s home building and building materials analyst. East reports that Lowe’s ebb-tide outlook is no surprise. What could non-plus industry observers, however, can be found under the rug. Here’s what we mean.
On Lowe’s conference call this morning, the details of the quarter were unsurprisingly negative for most categories, thereby transferring the pain to building products companies. However, there were a couple of positives for our coverage, one surprisingly so. Lowe’s saw same store sales start weak in November, improve in December then weaken again in January, which obviously causes consternation for investors of building products companies.
Fortune Brands (FO) and Masco (MAS) likely suffered with most all product categories, while Mohawk Industries (MHK) may have been a beneficiary of a surprisingly positive performance. Only two categories associated with our companies covered had positive commentary—Paint and soft flooring. Management specifically mentioned that while total flooring was down double digits, Carpet sales remained strong. Given that Mohawk is a significant supplier, we find that encouraging. Paint was strong, which, while not helping Masco directly, implies that Home Depot will also turn in a good performance there, helping Masco and its dominant floor share in paint. To the negative for both FO and MAS, both Cabinets and Fashion Plumbing were down double digits. Given American Woodmark’s aggressive market share stance in Cabinets, we worry that these two companies could have not only endured poor comps, but also lost share. In Fashion Plumbing, these two competitors dominate the floorspace, so expect that to impact sharply on results in the quarter.
In sum, we are pleasantly surprised with the ray of hope on Carpet sales and the potential impact on Mohawk, however, the overall trends portend more struggles for FO and MAS.
The data suggests that rather than tackle the big ticket home improvement projects, consumers–showing that good old American ingenuity–would like to sweep things under a new carpet for the time being.
Here’s how equity investors are discounting for Lowe’s continued headwinds. Above is an intraday chart that shows how the market reacted to the company’s earnings announcement. Below is a 6-month look at the stock’s trend.
Friday, Feb. 20, 2009... A tough outlook.
Lowe's stock performance for the past 6 mos.
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