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Lowe's CEO dismisses rate fears
Tillman says moderate rise will not significantly impact home improvement retailer's business.
May 17, 2004: 11:20 AM EDT
By Parija Bhatnagar, CNN/Money staff writer

NEW YORK (CNN/Money) - Lowe's Cos. CEO Robert Tillman said Monday that a moderate rise in interest rates would "not have a significant impact" on the home improvement retailer.

"Lowe's today is in a better position to weather interest rate increases because we've shifted our customer focus," Tillman said during the company's conference call after it reported first-quarter earnings rose 8 percent, topping forecasts on Wall Street.

"Back in 1994 to 1998, about 15 percent of our business was accounted for by new home owners," he added. "None of our business today is dependent on that category because a large portion of our business is now driven by demand for home maintenance and repair."

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Indeed, concerns about the housing market and rising interest rates have weighed on investors' minds.

Shares of Lowe's (LOW: down $1.09 to $49.49, Research, Estimates) , the second-largest home improvement retailer behind Home Depot (HD: Research, Estimates), are down about 9.5 percent year-to-date; Home Depot shares have slumped 5.5 percent in the same period. Lowe's stock was down as much as 2.5 percent Monday.

Tillman also addressed the issue of higher gasoline prices, saying that while they're negative for consumers and the economy, the home improvement sector is "somewhat insulated."

"If people are not going on vacation, we could see them spend that time and money instead on investing on their homes," he said.

First-quarter profit beats forecasts

In its report, Lowe's cited strong sales of higher-priced items such as outdoor power equipment and kitchen cabinets for a boost in its first-quarter profits and sales.

The Mooresville, N.C.-based retailer earned net income of $455 million, or 57 cents a share, up from $421 million, or 53 cents a share, a year earlier.

The results topped the analysts' consensus forecast of 54 cents a share, according to earnings tracker First Call.

Sales for the quarter jumped 22 percent to $8.8 billion, ahead of Wall Street forecasts of $8.5 billion.

Comparable-store sales, or sales at stores open at least a year, jumped 9.9 percent in the quarter. But the retailer offered a more conservative forecast, saying it expects comparable-store sales to rise 3 to 5 percent for the second half of the year.

"Last year we had very strong comparable sales, especially in the third quarter," he said, adding that tax rebates and good weather helped boost sales of lawn and garden products, among others. "In the future, some of these things are our of our control," he added.

Michael Baker, analyst with Deutsche Bank who has a "buy" rating on Lowe's, said the company was appropriately conservative with its sales guidance.

"As Robert pointed out, there were a number of factors that helped the company in the second half of 2003 and they're not counting on those factors to be repeated," said Baker.

"Regarding interest rates, that's more a factor for the stock valuation than for their business," he added. "In fact, rates will have to rise pretty considerably before the home improvement business gets affected."

However, SG Cowen analyst Joseph Feldman was more skeptical.

"You can't dismiss rate concerns entirely," said Feldman. "I do agree that short-term sales trends will hold up, but that's also because typically there's a six to nine months lag when consumers negatively react to rising interest rates."

Looking forward, the retailer said its expects to earn 89 to 91 cents a share for the second quarter, in line with analysts' estimates, and $2.85 to $2.88 a share for the full year, excluding the impact of an accounting change.

Including one-time items, it forecast earnings of $2.69 to $2.72 a share. The Wall Street consensus estimate for the full year is for a profit of $2.66 a share, according to First Call.  Top of page




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