Lowe's: Housing 'correction' may take 18 months
No. 2 home improvement retailer sets strategy to spur sales amid 'challenging' business environment.
NEW YORK (Reuters) -- Home improvement retailer Lowe's, which warned on its full-year results Tuesday, expects it could take as long as 12 to 18 months for the slowdown in the housing market to stabilize.
Lowe's, the No. 2 home player in the sector after Home Depot, warned that its full-year 2006 profits would be at or near the low end of its previous forecast. The company blamed the cooling housing market as a risk to its business.
During the company's annual analysts' meeting, Lowe's executive vice president of business development Greg Bridgeford cited consumer income, employment and housing turnover as the three key drivers for the $720 billion home improvement industry.
Housing turnover is down 13 percent this year, he said. That, in turn, has negatively impacted mortgage refinance activity, which thus far has helped fuel overall consumer spending.
Even though income and employment growth is still relatively stable, Bridgeford said Lowe's will be challenged to grow its market share in a slowing economic environment, particularly in the housing "bubble markets" on the West and East coasts.
"We're seeing conflicting external forces. The process of correction could take over a year to 18 months. The key for us is for moderation in home pricing to occur between now and the next 18 months," Bridgeford said, adding that he anticipates a pick-up in the second-half of 2007.
The call was monitored via Web cast in New York.
The company said current sales were running below its prior expectations. Still, it expects to deliver per-share earnings at or near the low end of a range of $2 to $2.07. Analysts currently expect profit of $2.01 a share for the full year, according to First Call.
The retailer said it expects earnings per share earnings to rise between 10 to 14 percent for 2007 and between 12 to 16 percent in 2008.
For the 2007 fiscal year, analysts expect $2.23 a share, which would represent a rise of about 11 percent over expected 2006 profit.
"Deceleration in home improvement sales in the wake of deceleration in housing turns is completely consistent with historical patterns," Goldman Sachs analyst Matthew Fassler, wrote in a research report Tuesday.
"[Lowe's] management's earnings guidance in the midst of flagging sales is credible," he added.
Incentives for consumers and employees
Retail analysts have cautioned that a slowing housing market coupled with gas price inflation would likely hurt home improvement retailers and consumer spending overall.
Home Depot recently cited those trends as ongoing "challenges" in the coming months. The retailer last month also warned on its full-year results.
Given the backdrop of declining housing turnover, higher energy costs and difficult sales and comparisons for Lowe's versus the last two years, the company outlined strategies to boost its current sales and customer traffic trends.
For instance, the retailer plans to aggressively advertise its new line of energy-efficiency, moderately-priced home appliances, including refrigerators, developed in partnership with Frigidaire and Maytag (Charts) exclusively for Lowe's.
Nick Canter, Lowe's executive vice president for store operations, provided details during the call about efforts to enhance customer service. Among them, Lowe's recently implemented a "mystery shopper" program to provide feedback on shopping patterns and staff behavior to customers.
Lowe's will offer incentives, such as free cars and trucks and $1,000 annual bonuses to employees of high-performing stores.
As home sales soften, Lowe's management expects consumers will shift their focus to home repair and maintenance, thereby continuing to spur its business.
To that end, the company is investing in growing its more profitable "do-it-for-me" (DIFM) business. In addition to flooring, the company said it will expand services to include roofing, fencing, window and siding installments.
Lowe's estimates the DIFM market represents a $150 billion opportunity. DIFM sales currently account for 20 percent of its annual sales and have been growing faster than total sales.
Lastly, the company aims to trim operational expenses during a softening sales environment by shifting to more direct sourcing for its product and better inventory management.
New stores should help buoy sales
Lowe's CEO Robert Niblock told analysts that the retailer would continue to expand into large and small markets for the "foreseeable future."
He said Lowe's plans to open about 155 in 2007 and 150 stores in 2008 and boost its presence in Massachusetts, New York and Pennsylvania by as much as 40 percent.
The company currently operates more than 1,275 home improvement stores in 49 states
Lowe's expects sales to rise 10 to 13 percent in 2007 and 11 to 13 percent in 2008.