08/20/2012 07:18 EDT | Updated 10/20/2012 05:12 EDT

Lowe's lowers fiscal 2012 guidance, concedes Rona deal faces significant obstacles

A takeover of Quebec-based Rona by Lowe's is unlikely in the near future, the head of the U.S. home improvement giant said Monday in remarks that appeared to acknowledge obstacles the proposed transaction faces in Canada.

"First and foremost, an acquisition is not imminent," chairman, president and CEO Robert Niblock said during a conference call to discuss Lowe's (NYSE:LOW) second-quarter results, which missed expectations.

"We are evaluating our options and part of that evaluation, among other things, is whether or not we can complete due diligence and ensure a fair price and an adequate return on our investment," he told analysts.

However, Niblock added that "based on publicly available information, we believe that an acquisition of Rona would provide us with an opportunity to immediately and significantly expand our Canadian presence."

Should the transaction eventually go ahead, Niblock noted the decision earlier this year by Lowe's to change its organizational design to provide for a separation of management into U.S. and international operations.

"We made this decision in recognition that our U.S. and international businesses are in different stages of maturity, with market and cultural differences that require different approaches," he said.

The world's second-biggest home improvement retailer has so far been thwarted in its unsolicited $1.76-billion takeover bid for Rona Inc. (TSX:RON), Canada's largest home-improvement chain.

The Montreal-area company revealed the approach on July 31 and rejected it, saying the C$14.50 per share offer undervalues the company. The Quebec government also criticized the bid as not in the best interests of either the province or Canada and said it was examining ways to counter the offer.

Lowe's posted a 10 per cent drop in second-quarter net income, missing Wall Street's expectations, as the company was hurt by the timing of its revenues and a charge tied to job cuts.

The company also lowered its fiscal 2012 earnings and revenue outlooks on Monday.

Its stock was down $1.77, or 6.33 per cent, at US$26.10 in trading Monday afternoon on the New York Stock Exchange.

On the Toronto Stock Exchange, Rona Inc. shares were down 33 cents, or 2.39 per cent, at C$13.37.

Lowe's performance was in contrast to last week's report from rival Home Depot Inc. (NYSE:HD), which offered encouraging news about the beleaguered housing market.

Home Depot, which is the world's largest home improvement retailer, boosted its full-year outlook, citing its performance so far this year. It also said that strong cost controls and healthy sales of paint, bathroom accessories and kitchen installations helped lift its net income by 12 per cent during the period.

In response to stiff competition from Home Depot and a still weak home market, Lowe's has been working on strengthening customer service, reviewing all of its products and focusing more on e-commerce business.

Niblock conceded that the company's results had "fallen short of our overall expectations."

"However, I have confidence in our strategy and in our employees, and while we recognize the significant magnitude of change that we've asked the organization to absorb as we transform our business, we fully understand that we must improve our level of execution."

Last summer, Lowe's returned to its "everyday low price" strategy" by making price cuts permanent on a wide array of products across different categories.

When the housing market slumped in 2006, Lowe's had strayed by ramping up temporary discounts across the stores. But the pricing strategy is expected to take time to resonate with shoppers, accustomed to big discounts.

Lowe's earned $747 million, or 64 cents per share, for the period ended Aug. 3. That's down from $830 million, or 64 cents per share, a year ago.

Fiscal 2012 has one less week than last year. The timing shift lowered earnings by about three cents per share.

Removing a charge tied to previously announced job cuts and the impact of the timing shift, earnings were 68 cents per share.

Revenue fell two per cent to $14.25 billion from $14.54 billion. Lowe's said that the timing shift accounted for 1.8 percentage points of the decline.

Analysts polled by FactSet expected earnings of 70 cents per share on revenue of $14.44 billion, on average.

Revenue at stores open at least a year dipped 0.4 per cent and edged down 0.2 per cent at U.S. locations. This figure is a key gauge of a retailer's health because it excludes results from stores recently opened or closed.

For fiscal 2012, Lowe's now expects earnings of about $1.64 per share and revenue to be about flat with 2011's $50.21 billion. It previously predicted earnings of $1.73 to $1.83 per share, with revenue rising one to two per cent.

Wall Street foresees full-year earnings of $1.80 per share on revenue of $50.58 billion.

Lowe's, based in Mooresville, N.C., operated 1,748 stores in the U.S., Canada and Mexico at the end of the quarter.

— With files from The Associated Press