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Lowe's Poised for Growth

March 1, 2007
After a difficult fiscal fourth quarter because of last year's housing slump, Lowe's expects business to pick up this year

Although the recent housing slump nailed Lowe's, Mooresville, N.C., company executives believe they have weathered the worse of the housing crisis and that sales will improve later this year.

Profit at Lowe's fell 11.5 percent in the fourth quarter but beat analysts' expectations. The nations' second largest home improvement retailer said it earned $613 million for the three months ended Feb. 2, down from $693 million a year earlier.

Revenue fell 3.7 percent to $10.4 billion from $10.8 billion a year earlier. Same-store sales, a key measure of industry performance that is based on sales in stores open at least one year, fell 5.3 percent. The company had expected same-store sales to decline 4 percent to 6 percent for the quarter.

In comparison, Home Depot's sales at stores open more than a year fell 6.6 percent year-over-year during the fiscal fourth quarter. During the third quarter, Home Depot's sales had declined 5.1 percent.

“Sales continued to be pressured by a slowing housing market, tough comparisons to last year's hurricane recovery and rebuilding efforts, and significant deflation in lumber and plywood prices,” said Robert Niblock, Lowe's chairman and CEO.

Despite its decline in fourth-quarter sales, Lowe's is planning to move ahead with plans to open 150 to 160 stores in 2007, approximately the same number of stores it opened in 2006. Lowe's expects business to pick up later in its fiscal year, with total sales rising by 10 percent during the 12 months ended Feb. 2008 and sales at stores open more than a year staying flat or inching up by 2 percent.

During its most recent quarter, Lowe's opened 58 new stores, including three relocations. As of Feb. 2, Lowe's operated 1,385 stores in 49 states representing 157.1 million square feet of retail selling space, a 12.1 percent increase over last year.

Lowe's isn't the only home-improvement chain that was hit by the housing slump. Competitor Home Depot reported that its fourth-quarter income fell nearly 30 percent. Home Depot also faces other problems, including the resignation of CEO Robert Nardelli in January. While Lowe's is planning to open up to 160 stores in 2007, Home Depot plans to open 115 new stores this year. Between now and 2010, Home Depot plans to open 300 to 400 new stores.

Lowe's was founded in 1946 as a small hardware store in North Carolina. According to the company's Web site, the modern Lowe's began in 1994, when its new store expansion consisted of only large stores, which Lowe's defines as stores with greater than 85,000 square feet of selling space. Lowe's now operates 11 regional distribution centers around the country.

Scaling back its 140,000-square-foot box, a format it built in the 1990s, Lowe's relies on a 117,000 square-foot prototype in large markets and a 94,000 square-foot prototype for smaller markets, often in rural locations. Lowe's has said its 2007 store expansion plan is primarily focused on the nation's top 100 metro markets, which account for nearly 65 percent of the home improvement revenue potential in the United States. Lowe's says it will balance its metro expansion with the opportunities presented in smaller markets, many of which are ideal locations for its 94,000-square-foot store prototype.

In its fiscal 2005 annual report, Lowe's said that approximately 50 percent of the 155 stores it planned to open in 2006 would be in its under-penetrated Northeast and West divisions. The percentage of its stores located in the nation's top 25 and top 100 markets was increasing 28 percent and 55 percent, respectively, at the end of 2005. More than 35 percent of the 400 approved projects for the company's future expansion are located in the nation's top 25 markets and more than 65 percent are located in the nation's top 100 markets, the company said at that time.

As part of its strategy for long-term growth, Lowe's plans to open three to five stores in Monterrey, Mexico, in 2009, representing an investment of $18 million to $20 million per store.

The retailer is also set to open its first Canadian stores in the Toronto area in the second half of this year.

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