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

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 is helping it narrow the gap with larger rival Home Depot Inc .

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

Shares of Lowe's, which also raised its sales forecast for the year, rose 7.5 percent to $34.37 in early trading. By late morning it had surrendered some the gain and was up $2.10, or 6.5 percent, to $34.08.

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 also 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.

Sales at stores open at least year rose 1.8 percent both globally and in the United States, an improvement over the previous quarter's decline. Lowe's also reduced the same-store sales lead of Home Depot, which last week reported a 4.3 percent rise in quarterly U.S. same-store sales.

Lowe's U.S. same-store sales gain was 2.5 percentage points below Home Depot's. In recent quarters, the gap has typically been 3.0 to 3.5 percentage points.

Still, it was the 14th straight quarter that Lowe's same-store sales lagged those of Home Depot. The industry leader 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 the third quarter ended November 2, while analysts on average expected $11.9 billion, according to Thomson Reuters I/B/E/S.

The company 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.

TRANSFORMATION TAKING HOLD

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

On a call with analysts, Chief Executive Robert Niblock said the company's current transformation phase would end in mid-2013.

Lowe's third-quarter sales had gotten 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 he warned that customers remain careful in their spending.

"They perceive the path to recovery to be a bumpy one," Niblock said. Lowe's internal research showed most home improvement projects planned by customers will be for less than $500.

In September, Lowe's withdrew its C$1.8 billion ($1.86 billion) proposal to buy Rona Inc in the face of opposition to the unsolicited bid 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 ripe for a takeover bid.

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 said.

Lowe'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, the profit came to 40 cents a share, 5 cents higher than analysts' estimates. Last quarter, Lowe's profit missed Wall Street forecasts.

Gross profit margin edged to 34.3 percent of sales from 34.1 percent.

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

Graphic: http://link.reuters.com/huc24t

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

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