No. 2 home-improvement retailer Lowe's Cos. on Monday said second-quarter earnings fell 19 percent on weaker-than-expected sales, adding fresh fuel to doubts about the ability and willingness of consumers to lead the U.S. economy out of recession.
Lowe's shares and the broader market fell sharply as investors worried that consumers remain tight-fisted in their spending habits. A recovery in consumer spending is crucial for an economic recovery because it accounts for two-thirds of all U.S. economic activity.
The weak results added to economic worries from Friday, when an indicator of consumer sentiment fell significantly short of expectations for the first part of August. Investor jitters about consumer spending sent the broader market sharply lower Monday, adding to Friday's losses.
Lowe's results Monday were a stark contrast to the prior quarter, when the company said it saw fresh signs of a consumer resurgence. Monday's release cited continued consumer weakness.
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The weak earnings combined with a narrowed full-year profit outlook to knock shares down $2.32, or 10.2 percent, to $20.51. During afternoon trading the company was the worst-performing stock in the S&P 500 Index.
"Wavering consumer confidence, unseasonable weather in core markets, and restrained customer spending compared to last year's fiscal stimulus-aided results led to lower than expected sales in the second quarter," Robert A. Niblock, Lowe's chairman and CEO, said in a statement.
The No. 2 home-improvement retailer says profit fell to $759 million, or 51 cents per share, from $938 million, or 64 cents per share, last year.
Revenue fell 5 percent to $13.84 billion from $14.51 billion last year.
Analysts predicted a profit of 54 cents per share on revenue of $14.35 billion. Lowe's had forecast earnings of 51 cents to 55 cents per share.
Sales in stores open at least one year, a key retail metric known as same-store sales, fell 9.5 percent.
Lowe's, like much of the housing and home-improvement industry, has been battered by a weak real estate market, rising unemployment and weak consumer confidence.
Niblock said in an interview with The Associated Press that the second-quarter results likely do not signal a shift in consumer behavior. Rather, weather was unseasonably cool and wet in the Northeast and fiscal-stimulus checks a year ago aided sales more than the company expected, Niblock said.
The weather also seriously crimped air conditioner sales, the company said, but due to a hotter August, air conditioners are now selling "at a pretty good clip," said Larry Stone, chief operating officer.
The company said it is scaling back expansion plans in 2010. The company now expects to open 35 to 45 stores during the year. It said it is also taking a $48 million charge for canceling plans for opening about 80 new stores that had been in the pipeline over the next few years.
Janney Montgomery Scott analyst David Strasser said the scaleback was positive.
"We had modeled 60 to 65 stores versus Lowe's new guidance of 35 to 45 stores," he wrote. "This is good for the overall industry."
Niblock said despite near-term pressure there are signs of a "bottoming process" in housing and the broader economy.
The real estate market nationally has shown some signs of stabilizing after months of falling housing values and transactions but remains historically weak.
Credit Suisse analyst Gary Balter kept his "Outperform" rating on the stock despite the weak results.
"While we expect the stock to remain under pressure in the near-term as the market unwinds its expectations for improving sales in the second half, we continue to believe that both Lowe's and Home Depot Inc. are well positioned for an eventual bottoming in housing and that underlying margin trends are strong."
For the third quarter, Lowe's predicts earnings of 21 cents to 25 cents per share, below analyst expectations, on a 2 to 5 percent sales drop. Lowe's expects yearly sales to fall about 3 percent on earnings of $1.13 to $1.21 per share, also below expectations.
Rival Home Depot is set to report second-quarter earnings on Tuesday. Its shares fell 81 cents, or 3 percent, to $26.33 during midday trading.