Tickers in this Article: LOW, HD, MAS, SMG, EXP
Home improvement retailing giant Lowe's (NYSE:LOW) reported disappointing sales and profit trends when it released third quarter results on November 14, 2011. This is nothing new to shareholders, and it appears the company is finally coming to terms with the fact that it has entered a "new normal" of minimal industry growth. Its latest attempts to revive its own growth prospects include right-sizing its store count and finding ways to revitalize demand for its merchandise. Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Third Quarter Recap
Net sales advanced a very modest 2.3% to $11.9 billion on even more modest comparable store sales growth of 0.7%. During its earnings conference call, management detailed that hurricane Irene boosted comps by 60 basis points on hurricane preparation and subsequent cleanup efforts. The opening of eight new stores brought total company locations to 1,744, which exist mostly in the United States but also Canada and Mexico. During the quarter, "particularly strong demand" was cited for "roofing products, dehumidifiers, pumps and tanks, generators, wet dry vacuums and cleaning supplies." Products singled out for weak trends included those in the millwork category, as an Energy Star tax credit last year stoked demand for entry doors, storm doors and windows, such as those sold by home products supplier Masco (NYSE:MAS). (For additional reading, check out Consumer Spending As A Market Indicator.)

Reported pretax earnings plummeted 46% to $352 million but included charges to close stores and right-size operations for continued anemic housing demand. The company estimated that these charges reduced pre-tax income by $336 million and diluted earnings by 17 cents per share. Reported net income fell 44.3% to $225 million while earnings fell 38% to 18 cents per diluted share. This came despite share buybacks that reduced shares outstanding by 10%. (For additional reading, check out Understanding The Income Statement.)

For the entire year, Lowe's expects sales growth of between 2 and 3% and diluted earnings per share in a range of $1.37 to $1.40 per diluted share. This includes 20 cents related to the store closing charges and overall represents a decline from previous guidance.

The Bottom Line
After negligible sales growth and a nearly 9% annual decline in profits over the past three years, Lowe's is coming to grips with the "realities of the economic environment we operate in today." Specifically, housing starts remain at an unprecedentedly low level, which concrete and gypsum wall-board manufacturer Eagle Materials (NYSE:EXP) highlighted in a recent company presentation. It showed annual housing starts below 500,000, or well off lows closer to 900,000 in past downturns. Peaks occurred around 1970, the mid-1980s, and during the peak of the housing bubble around 2006 where starts reached nearly 2.5 million.

Lowe's, along with archrival Home Depot (NYSE:HD), continues to work on ways to boost growth trends. For Lowe's, this will consist of closing 27 new stores and trying to breathe life into its merchandise mix. Certain product lines, including those from The Scotts Miracle Gro (NYSE:SMG), remain strong, but on balance, sales and profits will have to grow for the stock to make meaningful gains forward.

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

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