Tickers in this Article: LOW, HD, BBY, WMT, WHR, MAS
Home improvement giant Lowe's (NYSE:LOW) is no longer seeing sales plummet from the bursting of the housing bubble, but they continue to track below what management would prefer. Cost controls should continue to support profit expansion, but Lowe's share price will likely remain stuck in neutral until the top line picture improves. At the current stock price, a couple of big-box peers look more interesting in terms of investment appeal. (For more on retail stocks, check out Analyzing Retail Stocks.)

TUTORIAL: Earnings Quality

Second Quarter Recap
Net sales advanced a paltry 1.3% to $14.5 billion as the company opened two new stores and saw comparable store sales fall 0.3%. By management's measure sales came in below expectations and cited the fact consumers remain focused on smaller repair and maintenance projects, or those less than $500, and avoid bigger-ticket purchases, such as Whirlpool (NYSE:WHR) appliances and cabinets from the likes of Masco (NYSE:MAS). In its own words, "for both do-it-yourself and commercial business customers, we must drive more trips, close more sales and build bigger baskets." Online sales continued to grow briskly but sales at stores continue to struggle overall. Lowe's also announced it would be closing seven underperforming locations.

Higher sales costs reduced gross margin growth by 0.37%. Other expense growth was only 0.4% but pushed operating income down 0.5% to $1.3 billion. Lower income tax expense meant net income fell only 0.2% to $830 million but share buybacks pushed earnings per diluted share up by 10.3% to $0.64.

For the six-month period, operating cash flow jumped 18.4% to $3.3 billion while free cash flow advanced 15.8% to $2.5 billion. This significantly exceeded reported net income for the first two quarter of the year of $1.3 billion.

Outlook
For the full year, Lowe's currently anticipates sales growth of 2% from the $48.8 billion it reported in 2010. It expects earnings between $1.54 and $1.69 per diluted share for year-over-year.

The Bottom Line
Archrival Home Depot (NYSE:HD) had stronger second quarter sales growth of 4.2% as comps improved a much stronger 4.3%, but also expects full-year sales growth in the low single digits. Like Lowe's, it is relying on cost controls and share repurchases to boost the bottom line.

At a forward P/E of about 11, Lowe's is reasonably priced. Free cash flow production is likely to continue to exceed reported earnings for the full year, but the stock will likely hold limited appreciation potential until sales trends improve. Home Depot trades at a similar forward multiple, as does big-box retailing giant Wal-Mart (NYSE:WMT). But in Wal-Mart's case, it has international growth prospects to rely on until domestic trends improve. Looking at other big-box retailers, Best Buy's (NYSE:BBY) domestic prospects are also uncertain, but it has some level of international growth and a forward P/E of below 7. Both Wal-Mart and Best Buy look to have slightly more appealing growth prospects for a similar and lower earnings multiple, respectively. (To learn more about investing in the retail industry, read The 4 R's Of Investing In Retail.)

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