Lowe's Cutting Costs, Not Jobs

By Mark Whistler | February 25, 2008 AAA

Waning housing markets are hitting homebuilders hard these days, and now hardware stores are feeling the pain, as consumers have less cash for fix-up projects at home. Case in point, Lowe's (NYSE:LOW) witnessed fourth-quarter earnings decline of more than 33% year over year, and the outlook for the first quarter isn't optimistic, with the company's earnings press release stating same store sales could decline 5% during the first quarter.

Lowe's is putting up a decent fight. It has canceled most of its own store reno projects and is cutting costs without printing pink slips. Rival Home Depot (NYSE:HD) announces earnings on Tuesday, February 26. If Home Depot reports decent numbers, it will be a good sign for Lowe's and the sector.

Lowe Tide
For the full year, the company announced a net profit of $2.8 billion ($1.86 per share) compared with $3.1 billion ($1.99 per share) in the previous year. Citing troublesome business conditions, CEO Robert Niblock said in the statement, "Fourth quarter and fiscal year 2007 sales fell short of our plan as we faced an unprecedented decline in housing turnover, falling home prices in many areas and turbulent mortgage markets that impacted both sentiment related to home improvement purchases as well as consumers' access to capital."

While Lowe's results aren't exactly stellar, they were expected. Common sense tells us that any business directly connected with housing markets is probably struggling right now. After all, if rising tides lift boats, falling ones lower them. The question now is, when will the low tide end?

One this is for sure, housing markets certainly aren't going to recover today, tomorrow or next week. The bottom could be nearing, but the earliest for such would likely be toward the end of the second quarter, and that's still a long shot. The economic stimulus plan calls for rebate checks for American consumers, but $600 for individuals and $1,200 for families certainly isn't going buy anyone a new house.

Some think recent rate cuts by the Fed will spur mortgages and refinancing, but I would argue they really haven't changed the picture. The fact is, in 2003 and 2004, when housing markets were booming, consumers had several chances at lower rates than today, and some were able to lock down 30-year loans near 5%. What's more, with the present credit crunch cutting out most stated income loans, there's a lot less money being handed out. At the end of the day, even with recent rate cuts, nothing has fundamentally changed within mortgage markets that would immediately trigger a housing rebound or help consumers refinance. (For more on rate cuts and the economy, see The Federal Reserve's Fight Against Recession.)

Running A Tight Ship
Though Lowe's is experiencing tough business conditions, the company isn't in any real jeopardy just yet. For the first quarter, management is expecting sales to increase 2%, with EPS expected to come in at 38-42 cents a share. This guidance was on the low end of Wall Street expectations, and usually when a company guides lower than analyst predictions, investors can expect the stock to take a hit. That said, the lowered guidance could have been the best available course of action. If the company were to overstate expectations and then fail to please, the stock would probably be thrashed even harder.

Lowe's is a taking steps to weather the storm. The company is seeking to cut costs over the next year, and will postpone many major store re-merchandising projects through the following year. The company will keep its stores looking decent, but is putting most major overhauls on the back burner, too. So far, management is cutting costs in areas that will not involve layoffs. This is something that is tremendously respectable, and shows that management is not only business savvy but truly cares about its workforce.

The Road Ahead
Lowe's has a survival plan and has held up decently so far. More guidance will come from Home Depot when it announces earnings tomorrow. Home Depot is also seeing difficult conditions, as witnessed in recent announcements that it would chop 950 jobs in call centers and 500 jobs at the company's headquarters, but if Lowe's leading competitor can put up semi-decent numbers, or at least a reasonable forward outlook, perhaps the worst may truly be over.

For related reading, check out Can Earnings Guidance Accurately Predict The Future?

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