Just like its cash-strapped customers, home improvement giant Lowe's says it's working to keep expenses in check as it tries to weather a worsening economy.
In reporting its fifth straight quarterly earnings decline on Monday, the Mooresville-based retailer said it will stick to a strategy that has helped it gain market share from weaker rivals in recent months: Focus on customer service and smaller home projects while slowing the pace of store openings and controlling employment and inventory.
And given the dismal housing market, plummeting consumer confidence and tight credit, the company appears set to remain on that path into next year, officials say.
Lowe's earnings dropped 24 percent in the three months that ended Oct. 31, to $488 million, or 33 cents per diluted share. That compares with $643 million, or 43 cents a share, during the third quarter of 2007. The performance was better than expected, as analysts had forecast 28 cents a share.
Though total sales rose 1.4 percent, to $11.7 billion, for the quarter, sales at stores open a year or more, an important barometer of retail health, fell 5.9 percent.
Spending related to Gulf Coast hurricanes helped the company's bottom line.
But pressure on consumers has intensified in recent weeks, and fundamental issues will continue well into 2009 as people recover from years of loading up credit cards and reducing their savings rate, CEO Robert Niblock said.
“Now there's an adjustment process they're going through, a pullback and a shift in mindset,” he said. “Until we get a bottom under housing prices and the stock market, until the consumer puts that uncertainty behind them as to how bad it can get on both fronts, it's going to be challenging.”
Lowe's believed housing prices had appreciated at an unsustainable level in many markets and expected a correction, but didn't anticipate the depth of the foreclosure crisis, Niblock noted.
“We reasonably believed that if someone was qualified to buy a home, they were qualified to service that debt,” he said. “We assumed there were reasonable disciplines in place for lending money.”
On a national level, he said, it appears housing prices will bottom out in about the third quarter of next year, meaning that it probably won't be until 2010 that consumer spending rebounds “in a meaningful way.”
Third-quarter sales were worst in areas with the largest housing price declines, and even the best markets were relatively flat. Overall, chief operating officer Larry Stone said on a Monday conference call, “The negatives far outweigh the positives.”
Shoppers have continued to delay larger projects such as kitchen remodeling – and until that changes, it's unlikely Lowe's performance can improve beyond current levels, FTN Midwest Securities analyst James McCanless wrote in a research note Monday.
“Consumers must regain confidence in the current and future value of their home before spending large sums on renovation and repair work, which typically drive…improvements for Lowe's,” he said.
In the meantime, officials said, Lowe's is looking to contain expenses: The company earlier this fall announced plans to open 75 to 80 new stores next year, down significantly from previous years, and analysts say that number may still decline more.
Lowe's is also keeping a tight lid on inventory and payroll. As sales slow, store managers adjust staffing accordingly, Niblock said. And the head count at the corporate office in Mooresville, which employs about 2,000, has been flat to down in 2008. It has left many vacant jobs unfilled.
Monday, Lowe's also trimmed its fiscal outlook for the year, projecting yearly earnings per share of $1.48 to $1.54, down from $1.48 to $1.56 last quarter. Its stock hit a five-year low of $16.85 on Oct. 27, but has since rebounded and closed Monday at $18.99, up 76 cents for the day.
Its largest competitor, the Home Depot, reports third-quarter results today.