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Lowe's Results Point to Direction of Recovery

Lowe's has suffered a long slide as it, like the economy a little later, tripped over the housing sector implosion, but its recent results provide some evidence that the bottom is approaching and about what the recovery might be like.

In the first quarter, Lowe's earnings fell by 22 percent to $476 million, or 32 cents a share, year over year, but they beat the analyst average of 26 cents as compiled by Bloomberg. Sales declined by 1.5 percent to $11.8 billion and comparable store sales slipped by 6.6 percent. The latest completed was the 11th straight quarter that Lowe's comps declined, which approximately matches the collapse of the housing market. As the recession deepened last fall, housing market observers said that sector was suffering a rare double impact, as consumers weren't buying new houses but also weren't fixing up their existing dwellings, something they normally do in a downturn. That has begun to change, Lowe's management said in the company's first quarter conference call, as evinced by the sales shift toward the do-it-yourself business. DIY, even if in small measure, is stepping up to replace some of the installed product business lost at Lowe's, Robert Niblock, the company's chairman and CEO, said in the conference call:

Through the late '90s and the first half of this decade, we experienced significant growth in the DIFM, or do-it-for-me segment of our business--Throughout this downturn as consumers' net worth eroded and their concerns about the future escalated, they have increasingly become more disciplined in their spending. As a result, many homeowners have gone back to doing some of the things they previously relied on others to do. One of the biggest potential benefits of a resurgence in DIY is an increase in foot traffic as consumers make additional trips to Lowe's--In the first quarter, we saw evidence of this trend with relative strength in categories like paint, the number one DIY project, and also in [outdoor power equipment] repair and maintenance products, which had mid-single-digit positive comps in the quarter, as consumers migrated back to maintaining their own lawns.
In terms of sales, the negative 6.6 comp for the first quarter was driven by a 2.6 percent decline in transactions and a 4.2 percent decline in average ticket, more evidence that consumers are avoiding big cash outlays on major jobs. "Relative stability in transaction count is certainly encouraging but many consumers continue to postpone or stretch out major projects across several months, which is pressuring average ticket," said Larry Stone, Lowe's president.

Yet, the average ticket, or how much consumers spend per store visit, also provides evidence that consumers continue to take on small projects. "Highlighting this fact, first quarter comps for tickets below $50 were flat and comps for tickets above $500 were negative 14 percent," Stone said.

Lowe's has seen consumers become more willing to spend money domestically, which is consistent with developments in the home furnishings sector where retailers offering low-cost décor products, including dollar stores, Kirkland's and Wal-Mart, have seen success, and in entertainment, where relatively inexpensive products such as DVDs that consumers can enjoy around the house have been strong.

The promotional environment also demonstrates that consumer are slowly resuming more normal purchasing patterns. Lowe's has been moving product through its stores in a manner consistent with past price discounting sequences and with less resort to clearance sales, which is similar to what J.C. Penney reported in its own recent conference call. Such patterns suggest that economic decline is flattening although they also suggest recovery will be gradual as home and hearth become more comfortable places to await developments.

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