Lowe’s and behold

Should you touch the silver lining on a storm cloud? Shares in Lowe’s, the world’s second-largest home improvement retailer, jumped by almost a 10th on Monday on first-quarter results that were not nearly so bad as feared. But relief is a poor form of optimism.

Indeed, selling replacement doors to the new owners of foreclosed homes is no substitute for the mania of household improvement that accompanied the boom. Expensive kitchen counter tops are out – the installation business was down by a quarter year-on-year – while packets of seeds are in demand as consumers try growing their own food. Even though Lowe’s took overall market share, comparable store sales fell by 7 per cent compared with the year before, the 11th consecutive quarter of declines.

Meanwhile, the group continues to cannibalise its own sales. The long process of gaining approval means that expansion is based on aggressive plans laid down years before. Lowe’s opening programme has slowed, from about 150 locations annually at the peak, but it will still open about 65 stores this year. Expanding into this prolonged downturn, with an annual capital expenditure bill of $2.5bn, is hardly a recipe for higher returns.

Pricing at least seems rational compared with the rampant discounting of the fourth quarter. And operating margins are now expected to decline less than previously thought this year. But Lowe’s, like many retailers, faces the problem that it cannot cut costs as quickly as sales are falling. An investor contemplating the shares on 17 times prospective earnings needs reassurance that this trend of declining sales will soon reverse. On Monday the National Association of Home Builders’ index of homebuilder sentiment ticked up from 14 to 16. A number above 50 is supposed to indicate “good” conditions. Hardly a silver lining for the home improvement sector – more like the slenderest of copper threads.

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