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Lowe's Scales Back, Seeks Small Gains After Second Quarter Setback

Lowe's dumped cold water on Wall Street's rally, but it seems as if the retailer itself was flooded with a chilly reality in the second quarter, as sales, earnings and comps all fell significantly.

Earnings were the only one of the three big metrics that didn't suffer accelerating declines in the quarter â€" falling 19 percent both for the period and the first six months to 51 cents per share and 84 cents per share respectively â€" as opposed to sales, down just under five percent in the quarter and just over three percent for the six months, and comps, down almost 10 percent in the quarter and just over eight percent in the half year.

As opposed to the first quarter, when Lowe's exceeded analyst expectations, earnings and sales both fell below estimates in the second. Earnings came in at the low end of Lowe's guidance. Sales were $13.8 billion.

The sales slide, after previous cost-reduction measures, certainly points to a potentially more serious earnings erosion unless the retailer can find somewhere else to cut.

And it has. Lowe's is cutting back on its store-opening schedule, now planning 35 to 45 new stores 2010 and walking away from projects in the works, forcing it to take a pre-tax charge of $48 million for the second quarter primarily related to the real estate decision. So next year's schedule will substantially fall off this year's new store-opening pace, which covers 60 to 70 new locations.

Robert Niblock, chairman and CEO, seemed a bit taken aback in the company's second quarter conference call when noted, as transcribed by SeekingAlpha:

As expected, home improvement spending remained weak in the quarter. But even in this weak environment, we were disappointed with the magnitude of erosion in our comp sales performance from the first quarter. We expected challenging economic conditions but wavering levels of consumer confidence, unseasonable weather in many areas, and tougher than anticipated comparisons to last year's stimulus-related spending led to lower sales than we expected. We continue to see relative strength in outdoor products in the quarter but that was more than offset by pronounced weakness in larger ticket discretionary projects.
Small projects continue to drive Lowe's sales. Niblock said the number of consumers visiting the company's stores had declined by less than one percent and that comparable store sales in projects under $50 have actually improved. So Lowe's plans on shifting personnel to provide more support to customers who are shopping for minor painting projects as well as simple electrical and plumbing repairs. He asserted that 40 percent of consumers have postponed a major home renovation project because of uncertainty about the future, but that recently Lowe's had seen an increasing in detailing fees, a small charge for measuring that is done before major installations, suggesting that more folks are seriously considering a big spend on their homes.

As was the case with Wal-Mart, Niblock suggested that Lowe's had underestimated the influence of last year's stimulus checks on comparable store sales year over year, and he took a little shot at the more recent economic supports erected by the government when he declared that the company received "relatively little positive offsets to date from this year's stimulus package."

In the first quarter conference call, Lowe's management was relatively cheerful about its prospects, expressing some hope that the recession was approaching bottom and that a rebound might be pending, but, adopting a term Niblock used this time around, the process of "bottoming" seems to be proving longer and bumpier than previously anticipated.

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