Lowe’s Profit Misses Estimates as Retailer Lags Home Depot

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Lowe's Lags Home Depot's Home Improvement Profits

Lowe’s Cos. posted second-quarter profit that trailed analysts’ estimates, showing that the home-improvement retailer isn’t benefiting as much from the long expansion in housing prices as Home Depot Inc.

Profit in the three months through July 31 was $1.20 a share, Mooresville, North Carolina-based Lowe’s said Wednesday in a statement. Analysts estimated $1.24.

Lowe’s and Home Depot both have capitalized on years of housing-price gains, but Lowe’s is struggling to execute as well its larger rival. Lowe’s profit has now trailed analysts’ projections in four of the last eight quarters, and Home Depot has missed only once in that time. In the second quarter, Lowe’s sold more less-profitable items and didn’t control expenses as well as analysts had expected.

“We continue to favor Home Depot over Lowe’s as the slight premium in valuation that Home Depot carries is more than justified by its superior sales performance and ability to better leverage expenses,” Kate McShane, an analyst at Citigroup Inc., wrote in a note after the results were released.

Lowe’s shares rose 0.4 percent to $73.28 at 11:48 a.m. in New York. The stock had gained 6.1 percent this year through Tuesday, compared with a 17 percent advance for Home Depot.

Margin Shrinks

Lowe’s gross margin, or the percentage of sales left after cost of goods sold, narrowed to about 34.48 percent in the second quarter from 34.55 percent a year earlier. Analysts had projected the measure would expand to 34.61 percent.

The reduced profitability was caused by more promotions on items like appliances, the company said. Last year, Lowe’s decided to try to win market share in that category by increasing its discounts. The strategy has worked, with washer and dryers driving sales gains last quarter.

Selling, general and administrative expenses at Lowe’s were about 20.95 percent of sales in the quarter, down roughly 38 basis points from a year earlier. Citigroup’s McShane had estimated they would drop by 53 basis points.

There were bright spots, too. Same-store sales, a key measure of growth because only established locations are counted, rose 4.3 percent in the quarter. That tops the 3.9 percent gain analysts had projected and surpassed Home Depot’s 4.2 percent gain, marking the first time Lowe’s beat its rival since 2009. The increase was driven by people taking on larger projects as purchases above $500 rose 9.3 percent.

“Consumers are more and more willing to invest in their home,” Chief Executive Officer Robert Niblock said in an interview. “Their willingness to take their discretionary dollars and apply that to spending around their home continues to grow.”

Lowe’s also reiterated its annual forecast for earnings of $3.29 a share and same-store sales gaining 4 percent to 4.5 percent. Given that revenue by that measure advanced 4.7 percent in the first half, Lowe’s is expecting a slowdown in the final two quarters of the year.

Home Depot raised its earnings and sales forecasts on Tuesday.

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