By Sruthi Ramakrishnan
(Reuters) - Lowe's Companies Inc (N:LOW) reported lower-than-expected quarterly earnings on Wednesday and warned of slower growth in profit margins as it spends more on marketing and staffing to take advantage of a robust home improvement market.
Shares of the No.2 U.S. home improvement retailer dipped 6 percent to $71.27 in morning trading.
Demand for lumber, appliances and other products has soared as many homeowners increasingly prefer to remodel homes rather than buy a new house, because of an uptick in home prices.
A shortage of properties, along with higher costs faced by homebuilders, has kept home prices elevated and sidelined first-time buyers.
Lowe's said it would increase staffing during weekends and other high-traffic periods to improve customer experience and drive sales. The retailer is also keeping seasonal employees it hired temporarily for spring.
Lowe's will also offer more promotions to woo professional contractors, a clientele with deeper pockets than the company's long-established do-it-yourself customer base.
In fact, Lowe's bigger rival Home Depot Inc's (N:HD) sharper focus on contractors has helped it fare better than Lowe's in recent quarters.
As a result of the increased spending, Lowe's now expects its operating margin to rise 80 to 100 basis points in the year ending Feb. 2, down from an earlier forecast for a 120-basis-point increase.
Lowe's second-quarter earnings were dented by higher discounts as well as disruptions from changes made to its store staffing model, Chief Executive Robert Niblock said on a post-earnings call.
'PLAYING SECOND FIDDLE'
"While Lowe's is benefiting from the more buoyant demand from a strong housing market and stable economy, it still plays second fiddle to Home Depot - which remains more of a 'go-to' destination," Neil Saunders, managing director of GlobalData Retail, said.
Mooresville, North Carolina-based Lowe's marketing has been "slightly off-pitch" and has not resonated with consumers, Saunders said.
Lowe's net income rose 21.4 percent to $1.42 billion or $1.68 per share in the quarter ended Aug. 4. Excluding one-time items, it earned $1.57 per share, missing analysts' average estimate of $1.61, according to Thomson Reuters I/B/E/S.
Net sales climbed 6.8 percent to $19.50 billion but lagged analysts' expectations of $19.53 billion.
Sales at Lowe's stores open for more than a year rose 4.5 percent, edging past the 4.3 percent expected by analysts polled by Consensus Metrix.
With Wednesday's move, shares of Lowe's are only slightly higher since the beginning of the year, lagging Home Depot's 10 percent increase.