Lowe's cashes in on housing rally, just not as much as rival

In this Wednesday, June 29, 2016, photo, customers walk toward a Lowe's store in Hialeah, Fla. Lowe's reports financial results Wednesday, Aug. 17. (AP Photo/Alan Diaz)

MOORESVILLE, N.C. — The nation's two biggest home improvement stores may sell many of the same goods -- hammers, paints and patio furniture -- yet the benefits of a sustained U.S. housing recovery seems to be streaming mostly toward one of them.

On Wednesday, Lowe's reported disappointing sales growth at existing stores, its second-quarter profit was short of most expectations and the company cut its profit expectations for the year.

The quarter looked even more lackluster because it came one day after new U.S. data revealed a housing sector in full rebound mode and a quarterly earnings report from rival Home Depot, which posted record second-quarter sales and profits. It raised its profit expectations for the year as well.

The contrast sent shares of Lowe's tumbling 7 percent in midday trading.

Lowe's said its second-quarter results were hurt by its acquisition of Canadian home improvement retailer Rona earlier this year.

Yet sales at Lowe's stores open at least a year, a key gauge of a retailer's health, rose by less than half the 4.2 percent that industry analysts had projected, according to FactSet.

Comparable store sales at Home Depot rose 4.7 percent overall, and 5.4 percent in the U.S., a discrepancy noted by Citi analyst Kate McShane, who speculated that Lowe's same-store sales numbers may have been the result of its weaker presence in the West.

Michael Jones, Lowe's chief customer officer, noted as much during a conference call Wednesday, saying sales were stronger in the South and West, compared with stores in the North, where a late spring slowed sales of outdoor goods.

While Citi predicted pressure on Lowe's shares in the near term, McShane said investing in Lowe's is still a good way to get exposure to a housing recovery that is in full swing.

And that has certainly played out historically since the housing bust that kicked of the U.S. recession. Shares of The Home Depot Inc. and Lowe's have tracked closely for a decade, and both have been rising rapidly for the past five years.

This year, Lowe's now expects earnings of about $4.06 per share with revenue up approximately 10 percent, including an extra week in the year. Its prior guidance was for earnings of $4.11 per share. Same-store sales are anticipated to climb about 4 percent.

Analysts were looking for full-year earnings of $4.06 per share and expected a same-store sales increase of 4.7 percent, according to FactSet.

CEO Robert Niblock said in the conference call that Lowe's will benefit from an improving job market, low mortgage rates, and continued recovery in the housing market.

The Mooresville, North Carolina, company earned $1.17 billion, or $1.31 per share, in the three months that ended July 29, compared with $1.13 billion, or $1.20 per share, in the same quarter the year before.

Adjusting those per share earnings to account for 6 cents that were related to currency hedges from the Rona acquisition, it still fell a nickel short of analyst expectations, according to a poll by Zacks Investment Research.

Revenue climbed 5 percent to $18.26 billion from $17.35 billion, but that was also short of the $18.72 billion Wall Street was looking for.

Shares of Lowe's Cos. fell $5.50 to $75.99 Wednesday.

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Elements of this story were generated by Automated Insights (http://automatedinsights.com/ap) using data from Zacks Investment Research. Access a Zacks stock report on LOW at http://www.zacks.com/ap/LOW

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Keywords: Lowe's, Earnings Report, Priority Earnings

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