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Lowe's (LOW)
Lowe's Profit Drops; Company Expects Tough 2008
Mooresville, NC-based Lowe's, the nation's second-largest home builder, announced lower-than-expected guidance for 2008, citing a continued housing slump and consumer credit worries as major factors limiting growth. With share prices down nearly 30% since last February, investors have to be wondering how long they are going to have to wait until the next housing boom boosts the stock. If Lowe's announcement is right they are going to have to wait a while longer. With the Federal Reserve seriously debating the merits of another interest rate cut and with many consumers concerned over their credit card bills, what are the odds that the company will be able to show signs of recovery over the next few years?
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Lowe's announced a 33% drop in profit for its latest quarter on earnings of $408 million ($0.28/share). During the same quarter last year the company had $613 million in earnings. Despite the big drop in profit the company still beat the $364 million, or $0.25/share, expected by analysts by $0.03/share. Sales did decline to $10.38 billion from last year's $10.41 billion, and fell significantly below the expected $10.6 billion. Lowe's forecast for the current quarter is $0.38-0.42/share, and for the 2008 is $1.50-1.58/share. Both figures are below Wall Street estimates, with the 2008 guidance 10-14% lower than what was originally expected. Declining home prices, especially in previous hot spot areas like Florida and California, as well as more expensive credit are cited as the two largest factors expected to push down sales this year.
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All eyes may be, as usual, trained toward the Federal Reserve. A drop in interest rates would help Lowe's attract more customers, but at the same time the prospect of rising inflation could pre-empt the Fed from dropping interest rates further. Year-on-year inflation clocked in at 4.3% in January, with 2.5% for non-food and energy goods. As much as businesses and consumers would love to have lower interest rates, especially when it comes to making credit and loans cheaper, this may not be an option.
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The housing slump has spilled over into the credit markets, and credit card companies are seeing a increase in delinquency rates. Continued payment problems by debt-carrying customers could force credit card companies to boost rates, which is probably one of the last things that Lowe's wants to see happen. Neither home building nor home furnishing is a cheap endeavor, and if Lowe's has to rely on customer choosing a new washing machine over food it is in for an uphill battle. Dearer credit will severely limit the company's ability to offer deep credit discounts, such as no interest offers, since the odds of default by consumers is higher than usual. This is probably one of the primary reasons that same store sales declined by 7.6% during the last quarter.
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With the horizon not looking all that hot how does Lowe's plan to weather the storm, especially if the storm last into 2009 and beyond? The company has plans to reduce its staff in order to trim its budget, but no figures have been released indicating just how large of a reduction is in the works. Considering that Lowe's most likely won't be able to push home prices higher, 2008 may simply be another year that the company hunkers down and waits for rosier economic conditions. Investors so far seem to agree, since Monday's announcement was accompanied by a 4.6% jump in its stock price.
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