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Lowe's earnings decline 7.9%

Lowe's reported its fourth straight quarterly earnings decline Monday amid continued doldrums in the housing market. And the news came with a message: Don't expect this to be the end of it.

Though the Mooresville-based retailer announced better-than-expected second-quarter profits, company officials are projecting soft sales for the rest of the year.

In an interview, chairman and CEO Robert Niblock said he doesn't expect the housing market to turn around until about the middle of next year.

Additional bad news in the credit markets could delay that, though, as could continued high food and gas prices and mounting unemployment, which leave less money for homes.

“At the end of the day, consumers have to be able to meet their monthly obligations. …Something has to give,” Niblock said. “To the extent consumers are more and more challenged, that is certainly going to push out the recovery time frame.”

Niblock said he believes the drop in home sales is leveling off, meaning buyers will be able to work through excess inventory. But delinquencies, foreclosures and the sheer number of homes for sale will continue to pressure the market. Charlotte and North Carolina, he noted, have held up “much better” than the nation as a whole.

Lowe's earnings fell 7.9 percent, to $938 million, or 64 cents a share, during the three months that ended Aug. 1. That compares with a net income of $1.02 billion during the same period last year.

In the current economic climate, that's a solid performance, analysts said. They had predicted earnings of 56 cents a share.

Lawn and garden products and federal economic stimulus checks boosted second-quarter sales, Lowe's officials said. Consumers, they said, worked to repair damage from last year's drought and didn't shy away from small projects around the home.

With the stimulus checks spent and fall and winter on the way, however, the factors that lifted the second quarter won't be around the rest of the year, and the company and analysts expect the rest of 2008 to be down.

Sales of big-ticket items, in particular, will continue to decline until homeowners can expect to partially recover the cost of major improvement projects when they sell their homes, said analyst Jay McCanless of FTN Midwest Securities.

Lowe's sales increased to $14.5 billion, up 2.4 percent from $14.1 billion, in the second quarter. But sales at stores open a year or more, an important gauge of retail performance, declined 5.3 percent, and the company is projecting that same-store sales will be down 6 to 7 percent for the year as a whole.

Nearly 90 percent of Lowe's stores are in markets that have experienced a year-over-year decline in housing prices. Those in California, Florida, the Gulf Coast, Arizona and Las Vegas fared particularly poorly, with double-digit sales declines compared with the same time last year. The center of the country, including Texas, Oklahoma and parts of the Ohio Valley and upper Midwest, performed best, Lowe's officials said during a conference call.

The performance of the housing market will also help determine Lowe's future expansion plans, officials said. The company is opening 120 stores this year, after putting plans for about 25 others on hold.

In a research note, analyst Peter Benedict of Wachovia said he thinks the company will cut back its new store opening plans in 2009. Lowe's will unveil firm numbers at an analysts' conference next month.

In the economic downturn, Lowe's has concentrated on managing expenses and gaining market share. Monday, officials said they'd made progress on both fronts.

Lowe's share of the home improvement market increased to 17.7 percent of units sold, up from 16.5 percent at the same time last year – the largest jump in eight quarters, the company said.

The company has also made changes to reduce in-store expenses. An example: switching from having a number of disposable product information and promotional signs around the store to having a few strategically located, reusable A-frame towers, which are more efficient and cost-effective, spokeswoman Karen Cobb said.

But in lieu of an economic recovery, analysts said, Lowe's can only go so far.

“Looking ahead, there are no indicators to us that the headwinds impacting home improvement retailers will subside,” analyst Wayne Hood of BMO Capital Markets wrote in a note Monday. “If anything, it appears that consumer spending on home improvement will likely remain as it has over the last year.”

Lowe's shares closed at $24.59, up 4 cents, or 0.16 percent. The company's chief competitor, Home Depot, is expected to report second-quarter results tomorrow.