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Impressive 3Q for Lowe's

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Lowe’s Companies Inc. (LOW - Analyst Report) recently posted third-quarter 2012 earnings of 40 cents a share that came ahead of the Zacks Consensus Estimate of 35 cents and rose 11.1% from 36 cents earned in the year-ago quarter. Including one-time items, earnings came in at 35 cents -- almost double the 18 cents delivered in the prior-year quarter.

With housing market still recovering at a soft pace, Lowe’s better-than-expected results did come as a surprise. This second-largest home improvement retailer was one of the beneficiaries when Hurricane Sandy hit the U.S. east coast. Customers rushed to its outlets to get hold of flashlights, generators and batteries before the storm and came back to buy materials for repairing purposes after Hurricane Sandy wreaked havoc.

Consequently, Lowe’s witnessed an increase of 1.9% in revenue to $12,073 million -- following a decline of 2% in the second quarter -- that also outpaced the Zacks Consensus Estimate of $11,923 million. A shift in the comparable week resulted in $62 million or 0.5% of the decline in sales.

Comparable-store sales grew 1.8% during the third quarter after registering a drop of 0.4% in the second quarter. Lowe’s also indicated that comparable-store sales for the U.S. operation jumped 1.8%.

Despite a 1.5% increase in cost of sales, gross profit climbed 2.6% to $4,143 million aided by top-line growth, whereas, gross profit margin expanded 26 basis points to 34.3% from the prior-year period.

Stores Update

Lowe’s plans to open 10 new stores during fiscal 2012. As of November 2, 2012, the company operated 1,750 locations in the United States, Canada and Mexico.

Other Financial Aspects

Lowe’s ended the quarter with cash and cash equivalents of $1,091 million, long-term debt of $9,004 million, reflecting a debt-to-capitalization ratio of 38.8%, and shareholders’ equity of $14,225 million. The company generated about $3,508 million in cash flow from operations during the first nine months of fiscal 2012.

During the quarter, the company bought back 29.6 million shares, aggregating approximately $850 million and paid dividends of $184 million. In the first nine months of fiscal 2012, the company bought back 124.4 million shares totaling approximately $3.6 billion and paid dividends of $524 million.

Strolling Through Guidance

Lowe’s continues to expect fiscal 2012 earnings of $1.64 per share. The current Zacks Consensus Estimate for fiscal 2012 is $1.66.

Management reiterated that total sales for fiscal 2012 (52-week) is expected to remain even with fiscal 2011 (53-week). Compared with a 52-week 2011, sales are expected to climb approximately 2%.

Lowe’s, which faces stiff competition from The Home Depot Inc. (HD - Analyst Report), now expects marginal growth of 1% in comparable-store sales.

Home Depot also posted better-than-expected third-quarter 2012 results. The quarterly earnings of 74 cents a share surged 23.3% year-over-year, and surpassed the Zacks Consensus Estimate of 70 cents a share. Following solid results, management raised its fiscal 2012 adjusted earnings guidance to $3.03 per share from $2.95 forecasted earlier.

Let’s Conclude

With the global economic environment still not completely out of the woods, we believe that spending on big remodeling projects will likely remain under pressure until the housing market stabilizes, inventory levels normalize and consumer-spending rebounds.

Currently, we have a long-term Underperform recommendation on the stock. However, Lowe’s holds a Zacks #2 Rank that translates into a short-term Buy rating, and well defines the company’s stronger-than-anticipated results.

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