Lowes Inc. CEO Robert Niblock said the companys 76 percent rise in third-quarter profits shows the companys improvement plan is on track. But he was cautious in the face of challenges such as the fiscal cliff, the unknown impact of health care reform, and a sluggish housing market.
The nations second-largest home improvement retailers financial performance improved in large part because Lowes avoided large one-time charges that dragged down its results last year.
Analysts greeted Lowes results favorably Monday, and investors responded enthusiastically. Shares of Lowes surged $1.98, more than 6 percent, to close at $33.96 a share. Over the past six months, Lowes stock has risen more than 19 percent.
Still, executives on Monday said many consumers are holding back on big-ticket purchases and major projects, as economic uncertainties abound.
The only uncertainty thats been clarified is whos going to be president and the members of Congress, CEO Robert Niblock told the Observer. That level of uncertainty is behind us, but I do think this fiscal cliff, not knowing how its going to be resolved or when its going to be resolved its front and center. I do think that will have an impact on consumer spending.
Lowes reported a quarterly profit of $396 million, up from $225 million last year. Sales for the third quarter rose 1.9 percent, to $12.1 billion, and sales at stores open for a year or more increased 1.8 percent.
Executives said the companys improvement plan, designed to cut costs and make it more competitive with chief rival Home Depot, is yielding results. Last week, Atlanta-based Home Depot reported more rapid sales growth at stores open for a year or more, 4.2 percent, than Lowes. Overall sales at Home Depot rose 4.6 percent, to $18.1 billion, for the quarter.
Lowes is focused on expanding its online business, making stores more appealing to shop by offering more local product differentiation, changing display techniques in stores, and holding down the costs it pays for items from vendors.
The company also eliminated about 10 percent of its 5,200-strong corporate workforce at Mooresville and Wilkesboro via buyouts earlier this year.
We are keenly focused on improving our core business, Niblock said during a conference call with industry analysts. Our level of execution is improving and we delivered solid results in the third quarter.
Last year, one-time charges stemming from that improvement plan stunted Lowes third quarter results. The company recorded third quarter 2011 charges of $368 million for project discontinuations, asset impairments, and the closing of unproductive stores.
This year, such one-time charges totaled only $85 million during the quarter.
Consumers still skittish
Customer surveys indicate that many people are still holding off on major purchases, Niblock said. The vast majority of customers upcoming projects are planned to be less than $500, with many citing lack of income growth or a reluctance to borrow money as a cause for their thrift.
The majority of homeowners indicate their spending is staying the same or declining compared to a year ago, Niblock said. Still, with housing prices stabilized or rising in many markets, Niblock said many customers are cautiously optimistic.
But sales of big-ticket items, which had fallen sharply during the downturn, also saw the most rapid growth in Lowes most recent quarter. Sales of items for over $500 rose 2.5 percent from the same period last year, sales of items from $50 to $500 rose 1.6 percent, and sales of items under $50 rose 1.3 percent.
Hurricane Sandy, which struck just as Lowes quarter was ending, caused about 200 stores to have shorter hours, and briefly closed a handful of stores. Lowes 1,750 stores are all up and running now, executives said. The retailer could see a sales bounce as recovery and rebuilding projects continue through the fourth quarter and into next year.
Niblock said the company expects health care reform, which requires broader coverage for many workers, to raise costs over the long run. However, he said Lowes is still waiting to see how health care reform is actually implemented.
Theres still a tremendous amount of regulations that have to come out to provide the guidance about how its actually implemented, Niblock said. I would characterize it as still a work in progress.
While some retailers and restaurant groups have said theyre experimenting with reducing and capping workers hours to cut down on the number of workers they have to offer coverage to, Niblock said Lowes hasnt reached a decision. We will ultimately do things to mitigate that, but until some of the regulations are out we havent made the decision about how we will mitigate, Niblock said.
Niblock also said Lowes is still looking at options to expand in Canada. The companys $1.8 billion buyout offer for Rona, a Canadian home improvement retailer, was rebuffed earlier this year, and Lowes withdrew the bid. The acquisition would have been Lowes largest to date.
But Rona has since gotten rid of its CEO, and analysts have said the company is now likely to be more receptive to a bid from Lowes. Niblock deflected questions Monday, saying it would be inappropriate to comment on Lowes plans for any potential acquisitions.
He did say that Lowes, which currently has 32 stores in Canada, needs more locations there. Well also continue to look at acquisitions as a means of expansion, Niblock said.
Analysts said Mondays earnings report was positive for Lowes. The company is seeing signs of stability in sales, wrote Wayne Hood, an analyst with BMO Capital Markets, in a note to clients. Furthermore, the company did well to keep inventory lean, as inventory was flat year-over year on 1.9 percent sales growth.