Profits at Mooresville, N.C.-based Lowe's Inc. fell 10 percent for the second quarter, the retailer reported Monday, and the company cut its outlook for the rest of the year as it struggled with falling sales and mistimed discounts.
The drop in earnings, which sent Lowe's stock down more than 6 percent by midday Monday, stands in contrast to its main rival, Home Depot. Last week, the Atlanta-based company reported a second-quarter profit of $1.5 billion, up 12 percent. The company's sales also increased 1.7 percent, to $20.6 billion, and Home Depot also raised its earnings forecast for the year.
Lowe's revenue fell 2 percent compared to the same quarter a year ago, to $14.2 billion. The company said the majority of that drop is attributable to a calendar shift that included an extra week in last year's second quarter. Sales at stores open a year or more, considered a key measure of a retailer's health, fell 0.4 percent.
Lowe's reported net income of $747 million, compared to $830 million during the same quarter a year ago.
"Our results fell short of our overall expectations," said Lowe's CEO Robert Niblock. He said the company, which is in the midst of a strategy to emphasize online and mobile sales, localize product assortments, and move to "everyday low prices" instead of frequent promotions, is lagging.
"Given the magnitude of change, we understood there would be some level of disruption," Niblock said. "Frankly, the benefits are accruing at a slower rate than I expected. It will likely be mid-2013 before we fully complete this phase of our transformation."
In an interview with the Observer, Niblock also said the company pulled back on promotions too sharply, hurting it relative to Home Depot as customers stayed away.
"We pulled back too much on our promotional cadence around Memorial Day," he said. "We didn't drive as much traffic to our stores."
The company then overcompensated, and offered discounts that were too steep, especially on big-ticket items. That hurt profit margins.
"We overcorrected and added too heavily to big-ticket promotions," said chief customer officer Greg Bridgeford. He said the retailer is reassessing its promotional strategy, as well as its current advertising campaigns.
For the rest of fiscal 2012, Lowe's cut its outlook and said it expects sales to be flat. The retailer also cut its earnings per share estimate to $1.64 a share, down from its previous guidance of $1.73 to $1.83 a share.
"While we are encouraged by improving housing metrics, we believe underlying demand remains soft, and our guidance has been adjusted to reflect that view," Niblock told analysts.
During the second quarter, Lowe's took $15 million worth of severance charges related to its reduction of headquarters staff. The company eliminated about 10 percent of its 5,200 corporate workers in Mooresville and Wilkesboro via buyouts. Niblock said the downsizing is complete.
The company spent approximately $1 billion to buy back its shares during the quarter. Earnings per share were 64 cents, the same as the comparable quarter last year.
Lawn and garden product sales were particularly hurt by a drought affecting much of the nation, said Lowe's executives. Building materials sales were down by double-digit amounts compared to the same quarter last year, in part because heavy storm damage last year drove higher demand.
While the housing market has shown some signs of life, Niblock said high unemployment, slow economic growth, and uncertainties about health care, tax policy and looming mandatory federal spending cuts are weighing on business.
"Income growth is still weak, unemployment is still high," he said. "The overall macroeconomic environment has its challenges."
Niblock said a deal to acquire Canadian home improvement retailer Rona is "not imminent." Lowe's disclosed late last month that it had offered about $1.8 billion to acquire the company, which Rona rejected. The deal would be Lowe's largest acquisition. Niblock said Lowe's is still interested in Rona, and didn't rule out a hostile bid.
"We have a preference for a friendly transaction, but we will evaluate all options and see what makes sense," he said. "Our focus right now is to get scale for our business in Canada."
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