By Dhanya Skariachan
(Reuters) - Lowe's Cos Inc <LOW.N> reported stronger-than-expected quarterly results as the housing market's recovery encouraged Americans to spend more on their homes, and the No. 2 home improvement chain narrowed its sales gap against rival Home Depot Inc <HD.N>.
The results prompted Lowe's to raise its fiscal-year outlook, and its shares hit an all-time high on a split adjusted basis on Wednesday.
The news came the day after Home Depot also reported rosy results, giving further proof of the strength in the U.S. housing market recovery.
Lowe's sales at stores open at least a year rose 9.6 percent in the second quarter ended on August 2 but trailed the 10.7 percent increase at Home Depot.
However, that is the narrowest gap in same-store sales between the two retailers since the third quarter of 2010, BMO Capital Markets analyst Wayne Hood said.
"This could signal that (Lowe's) product line reviews and merchandise assortment overhaul are starting to work," Hood said.
Home improvement chains, whose sales crumbled during the housing downturn, are enjoying a comeback as rising prices for homes have led to renewed interest in renovating them.
"We think both companies are on a pretty good surfboard in front of a pretty good tsunami," said Bill Smead, a portfolio manager at the Smead Value Fund in Seattle.
U.S. home resales rose in July to a more than three-year high, the National Association of Realtors said on Wednesday, suggesting a sharp rise in borrowing costs has had only a limited impact on the housing recovery so far.
"The rate increases will likely take some steam out of the recent housing market rebounds, but shouldn't derail it as long as job gains persist, homes continue to appreciate and rates rise more gradually going forward," Lowe's Chief Executive Officer Robert Niblock said on a conference call.
Smead's firm holds Home Depot shares and sees better longer-term prospects for the industry leader, citing its strong management team, free cash flow and balance sheet.
Some analysts also say Home Depot will continue to outperform Lowe's on the sales front for a while, in part because it derives much more revenue from the key contractor and professional customer group.
These customers account for 35 percent of Home Depot's sales, compared with 25 percent at Lowe's. Some analysts have said it is hard to close that gap quickly because Home Depot has more stores than Lowe's in major metropolitan areas, where many of the professional contractors are based.
Lowe's recently agreed to buy several neighborhood hardware and garden stores in California from Orchard Supply Hardware Stores Corp <OSHWQ.PK>, which Sears Holdings Corp <SHLD.O> spun off less than two years ago. The deal gave Lowe's access to Orchard's prime locations in high-density markets in California, an area where it was under-represented.
Shares of Lowe's were up 4.4 percent at $46.05 in afternoon trading after rising as high as $47.25 earlier in the session. Home Depot dipped 0.2 percent to $74.11.
Both stocks trade around 19 times expected earnings for the next 12 months, making them more expensive than many of their retail peers.
Lowe's net earnings rose to $941 million, or 88 cents a share, in the second quarter from $747 million, or 64 cents a share, a year earlier. Analysts were expecting a profit of 79 cents a share, according to Thomson Reuters I/B/E/S.
Sales increased 10.3 percent to $15.71 billion, exceeding analysts' estimates of $15.06 billion.
For the fiscal year ending January 31, Lowe's said it expected total sales to rise about 5 percent, while it had previously called for a 4 percent increase. It raised its earnings-per-share forecast to about $2.10 from $2.05.
Home Depot was quicker than Lowe's to cut costs during the recession. In recent years, it has also benefited from its efforts to improve customer service and attract shoppers with more compelling prices than its rivals. It has tailored its marketing to local areas, centralized distribution centers and shifted more workers to jobs where they serve customers directly.
After losing share to Home Depot for several quarters, Lowe's laid out a turnaround plan. As part of its makeover, the smaller company started offering everyday low prices and products targeted to specific geographic markets.
It made its stores more appealing with improved signs, television displays that stream videos on how-to-do projects, and lower racks to make items easier to reach.
Lowe's has also increased its assortment of products available online and started mylowes.com, a website that allows shoppers to save their room dimensions, create a shopping list and set reminders to buy items such as air filters and batteries for smoke alarms.
(Reporting by Dhanya Skariachan; Editing by Lisa Von Ahn)