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Lowe's efforts to cut costs, spur sales paying off

A contractor loads a bathroom vanity cabinet onto his truck after purchasing it at a Lowe's store in Burbank, California August 17, 2009. RE
A contractor loads a bathroom vanity cabinet onto his truck after purchasing it at a Lowe's store in Burbank, California August 17, 2009. RE

By Phil Wahba

(Reuters) - Lowe's Cos Inc's reported a higher-than-expected quarterly profit on Monday in a sign its efforts to cut costs and improve its selection of home improvement items are working.

Preparation and rebuilding efforts tied to Superstorm Sandy and an improving housing market also boosted business at Lowe's, the world's No. 2 home improvement chain.

Shares of Lowe's, which also raised its sales forecast for the year, ended 6.2 percent higher at $33.96 in regular trade on the New York Stock Exchange.

Rival Home Depot has won shoppers from Lowe's in recent years by offering better pricing and service, while Lowe's strategy of "everyday low prices" rather than promotions has driven some customers away.

Lowe's has cut jobs, curbed store expansion and streamlined its supply chain to reduce costs while reining in inventory.

"The home improvement sector is still growing, so this is a sign that Lowe's is getting more of their fair share," Morningstar analyst Peter Wahlstrom said of the results.

U.S. home resales rose in October and a gauge of homebuilder sentiment climbed to a six-year high in November, signs the housing sector's recovery is gaining traction.

"It gives the homeowner what I call the psychological permission to spend on their home because they feel better about what the home's going to be worth in the future," Lowe's Chief Executive Robert Niblock told Reuters.

Sales at Lowe's stores open at least year rose 1.8 percent globally and in the United States, after declining in he previous quarter. Still, it was the 14th straight quarter that Lowe's same-store sales lagged those of Home Depot, which last week raised its full-year outlook independently of any future sales lift from Sandy.

Lowe's said sales rose 1.9 percent to $12.1 billion in its fiscal third quarter, ended November 2. That compared with the $11.9 billion expected on average by analysts, according to Thomson Reuters I/B/E/S.

The company said it now expects total sales for the fiscal year to be up 2 percent, excluding the effect of an extra week, compared with an earlier forecast of a 1 percent rise.

The retailer's third-quarter net income rose to $396 million, or 35 cents per share, from $225 million, or 18 cents per share, a year earlier.

Excluding some items like write-downs and a charge for a discontinued project, profit came to 40 cents a share, 5 cents higher than analysts' estimates. Last quarter, Lowe's profit missed Wall Street estimates.

The Mooresville, North Carolina-based company affirmed its outlook from August that full-year profit would come to $1.64 a share.

TRANSFORMATION TAKING HOLD

Credit Suisse analyst Gary Balter, in a research note, called the results "a promising inflection," a sign that efforts by Lowe's are "beginning to take hold."

The company's current transformation phase is set to end in mid-2013.

Lowe's third-quarter sales received a lift from people buying items like generators, flashlights and batteries ahead of Sandy, which made landfall on October 29, killing dozens and leaving millions without power for days and weeks, Niblock said.

But customers remain careful in their spending.

"They perceive the path to recovery to be a bumpy one," Niblock said.

In September, Lowe's withdrew a C$1.8 billion ($1.86 billion) unsolicited proposal to buy Rona Inc in the face of opposition from the Canadian home improvement retailer, its dealers and from politicians in Rona's home province of Quebec.

Earlier this month, Rona's CEO stepped down, reigniting speculation the Canadian chain could again be in play.

Niblock declined to speak specifically about Rona but did say Lowe's needs more scale in Canada, where it has only 32 stores. Deals are one way to do that, he said.

"We will also continue to look at acquisitions as a potential way for expansion," he told analysts.

(Reporting by Phil Wahba in New York; Additional reporting by Dhanya Skariachan; Editing by Lisa Von Ahn, Leslie Gevirtz and Steve Orlofsky)

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