Lowe's warns 2016 earnings will take a hit because of Rona acquisition

This March 25, 2014 photo shows a Lowe's store in Philadelphia. (AP Photo/Matt Rourke)

MONTREAL -- Lowe's is blaming its lowered earnings outlook for 2016 on the acquisition of Rona, but says it's on track to double the Canadian chain's profitability within five years.

The U.S. retailer trimmed its full-year profit estimate since May by 1.2 per cent to US$4.06 per share, despite saying it expects to benefit from growing U.S. consumer spending spurred by rising incomes and home values.

Sales for the 12 months ended Feb. 3, 2017 are expected to be higher, growing by 10 per cent, including four per cent from Rona.

"The only changes to our outlook are related to Rona," Lowe's chief financial officer Bob Hull said Wednesday during a conference call about second-quarter results.

Rona's profitability as a per cent of sales lags Lowe's but the company said it expects that "will improve over time."

Lowe's (NYSE:LOW), headquartered in Mooresville, N.C., also said Rona's operating results will more than offset acquisition and integration costs, and are expected to be "modestly" positive for the year.

Since closing the C$3.2-billion purchase of Rona on May 20, Lowe's initial focus has been integrating the Quebec-based company with the U.S. retailer's other Canadian operations outside the province.

"I'm pleased with the progress of our integration," noted Lowe's chairman and CEO Robert Niblock.

"By bringing together Lowe's global scale and resources with Rona's local expertise, we can enhance relevance and expand customer reach, ultimately enhancing our competitiveness and profitability in Canada."

Going forward, Richard Maltsbarger, Lowe's international president and chief development officer, said the company's priorities include taking advantage of the retailer's omni-channel strength to attract Canadian customers, increase revenues by adding new product categories like appliances, cut costs and boost profitability.

"All indications to date are that we are well on track for that, and we're quite encouraged by what we see," Maltsbarger told analysts.

Despite increased revenues coming mainly from five weeks of contribution from Rona, Lowe's second-quarter profit fell short of most expectations -- even after taking into account costs associated with acquiring the Canadian chain.

Sales at Lowe's stores open at least a year -- a key gauge of a retailer's health -- rose two per cent, less than half the 4.2 per cent industry analysts had projected and below rival Home Depot.

On Tuesday, Home Depot posted record second-quarter sales and earnings, including a 4.7 per cent increase in same-store sales, and raised its profit expectations for the year.

For the three months ended July 29, Lowe's earned US$1.17 billion, or $1.31 per share. (The company doesn't provide detailed Canadian results.)

Adjusting for six cents in foreign-exchange items related to the acquisition of Rona, Lowe's profit was up from last year but five cents short of analyst expectations of $1.42 per share.

Revenue climbed 5.3 per cent to US$18.3 billion but was about $185 million below a consensus estimate compiled by Thomson Reuters.

About US$460 million of the sales growth in the quarter came from Rona.

Analyst Jamie Katz of Morningstar warned that Lowe's integration of Rona could lead to some near-term challenges.

"We believe there will be some bumps in the road as these two businesses fold together, but that will not degrade the long-term earnings power of the business," he wrote in a report.

Lowe's had 2,108 home improvement and hardware stores in the United States, Canada and Mexico at quarter's end.

With files from The Associated Press