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Lowe's 3Q Below Expectations But Encouraging

MOORESVILLE, N.C. - As shoppers remain cautious about spending on major home improvement projects, Lowe's Companies Inc. experienced below-expectations third quarter results but saw gains in lower-priced, smaller-project products in 10 of the company's 20 major categories.
     During the earnings call last month of the 1,734 unit home improvement chain, which operates stores in the United States, Canada and Mexico, Nick Canter, evp, merchandising, said Lowe's grew its share "noticeably" in half of its categories, especially in small projects-related areas like tools, paint, and lawn & landscape, specifically, as well as in larger ticket items like appliances.
     The retailer is pursuing further growth in these segments by enhancing its value message with other incentives for shoppers.
     "Value is more than just an everyday competitive price," Canter said. "[It's about] low price plus innovation or low price plus compelling style or low price plus unmatched service."
     One way Lowe's is building on the "value plus style" effort is with its "allen + roth" brand of home décor products, which on the soft side includes soft window treatments and area rugs.
     "This line offers customers the ability to coordinate across many product categories, including window treatments, paint, lighting, bath vanities and accessories, closet organization and more," Canter continued. "The brand offers classic style with modern flair and provides our customers with a specialty store look that fits both their style and their budget."
     Results for the third quarter, ended Oct. 29 included: a 17.4% increase in earnings to $404 million and a 26.1% rise in earnings per share to 29 cents.
     Sales rose 1.9% increase to $11.6 billion, comps up 0.2%.
     "Although sales in the quarter trended below our guidance, our merchandising strategies helped us deliver 85 basis points of gross margin expansion in the quarter," said Robert Niblock, chairman and ceo. "Comp traffic and comp average ticket were also positive for the quarter.."
     Still, Niblock added, results for the quarter were lackluster, "impacted by the continued sluggishness of the economic recovery, driven by the ongoing uncertainty in unemployment and housing. As we've seen over the past several quarters, consumers are not yet willing to consistently take on larger, discretionary home improvement projects. They remain cautious and continue to rationalize the scope of their projects, or in many cases delay projects until they have better clarity about their personal financial situations, the value of their homes, and the overall macro-economic outlook."
     For the nine-month period net earnings increased 9.3% to $1.72 billion; earnings per share grew by 13.1% to $1.21; sales rose 3.5% to $38.3 billion; and comps were up 1.4%.
     Private brands contributed to the quarter's improved gross margins, Canter said. For that reason, the chain is expanding its private brands going forward.
     "We'll always be a house predominantly of national brands. But over the next few years we expect to further increase our penetration of private branded products from approximately 15% to 18%," Canter said.
     Lowe's fourth-quarter outlook calls for: the opening of about 17 stores; a 2% to 4% increase in total sales; a 0% to 2% gain in comps; an approximate 80 basis point increase in earnings before interest and taxes as a percentage of sales; and diluted earnings per share of 16 to 19 cents.

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