Lowe's: Housing woes easing in some markets

NEW YORK (CNNMoney.com) -- No. 2 home improvement chain Lowe's on Monday posted second-quarter profits and sales that topped Wall Street forecasts as investors also cheered news that the retailer's business was picking up in some key markets despite the ongoing housing downturn.

The Mooresville, N.C.-based retailer posted a second-quarter profit of $1.02 billion, or 67 cents a share, compared to $935 million, or 60 cents a share, a year earlier.

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Sales for the period rose 5.8 percent to $14.2 billion, helped by the opening of 26 new stores. Sales at Lowe's stores open at least a year, which is a key measure of retail performance known as same-store sales, fell 2.6 percent in the quarter.

Analysts had forecast the company to log a profit of 61 cents a share on sales of $14.1 billion, according to Thomson Financial.

Lowe's (Charts, Fortune 500) also issued a full-year profit warning but its stock still jumped more than 6.7 percent on the New York Stock Exchange as investors instead focused on the retailer's comment that it was seeing sales improvement in some key regions, despite ongoing housing- and credit-market challenges.

Lowe's results and market outlook also helped lift shares of rival Home Depot, the No. 1 home-improvement chain.

"Simply achieving same-store sales guidance was a feat in a tough macro backdrop. The earnings upside reflected sharply better gross margin, adding to the quality of [Lowe's] beat" of forecasts for second-quarter profits and sales, Goldman Sachs analyst Matthew Fassler wrote in a research note Monday.

"We expect this surprising report to exert a positive impact on the stock near term, as investors were poised for a sales miss and apoplectic about consumer- and housing-related issues in recent weeks," Fassler added.

In a conference call with analysts to discuss Lowe's results, CEO Robert Niblock discussed what he called the "macroeconomic" challenges to Lowe's business.

"A year ago, no one was aware how deep the credit problems would go and their impact on the marketplace," Niblock said during the call. "In the past few weeks there's been quite a bit of turbulence in the credit market. We're not directly impacted by that. However, the fallout of these problems, such as higher lending standards and job layoffs, would directly impact our business.... It's the unknown out there."

"Therefore, it's prudent for us to be cautious on our business," he added. To that end, Lowe's trimmed its full-year profit guidance to between $1.97 and $2.01 cents a share from its earlier forecast of $1.99 to $2.03 a share. Analysts surveyed by Thomson Financial currently expect the retailer to post a full-year profit of $1.97 a share.

The retailer said full-year sales are expected to rise 6 percent while same-store sales are forecast to decline about 2 percent for the year.

"We're giving ourselves more room in the back-half of the year," Niblock said. "If we don't see these pressures intensify in the back-half then hopefully we can deliver better results than our guidance."

Home Depot (Charts, Fortune 500) last week blamed the housing-market softness and the turmoil in the subprime market for its drop in second-quarter profits.

Home Depot's CEO Frank Blake said the retailer's second quarter was a "challenging one" for the company.

"As the subprime mortgage problems intensify, it's an important concern for us since subprime mortgages accounted for 22 percent of the dollar volume in the mortgage market last year," said Blake, during the company's conference call with analysts last week.

Subprime loans are made to consumers with poor credit, who are also core customers for retailers like Wal-Mart (Charts, Fortune 500) and Home Depot. A jump in subprime mortgage delinquencies has roiled the housing market - and is now affecting retailers as well.

Lowe's said 12 of its 22 market regions delivered positive comparable sales. However, the positive sales momentum was offset by worse-than-expected same-store sales declines in California, Florida and the broader Gulf Coast region.

"Markets in the Northeast, while still producing negative comparable store sales, are showing encouraging signs of improvement," the company said in its earnings release. "The many areas of the country where housing did not accelerate at an unsustainable rate over the past several years delivered positive comparable store sales."

What's more, Lowe's said it expects same-store sales to vastly improve in the months ahead, compared to last year when sales, especially in the Gulf Coast, were hit by a tough hurricane season.

Lowe's said it added market share in some key product categories, including paints, flooring, lighting, nursery, appliances and lawn & garden. However, cooler-than-normal weather in the last week of the quarter hurt sales of air conditioners, the retailer said.

Lowe's executives said sales of more expensive installation services such as kitchen renovation, carpeting and windows suffered last quarter because consumers feared taking on big discretionary spending.

Niblock said Lowe's was starting to see a sales uptick in installed categories, especially in the Northeast, although he cautioned that the company was "not out of the woods yet."

"[Consumers'] propensity to spend is getting better in the Northeast," he said.

"For now we will continue to closely watch the impact of subprime issues on credit availability and housing affordability," Niblock said.