The Home Depot (HDFree Home Depot Stock Report), the world's largest home-improvement retailer, has reported better-than-expected fiscal third-quarter (ended November 3rd) results. Sales climbed 7.4% from a year earlier, to $19.47 billion, slightly ahead of our $19.15 billion call. Meantime, comparable-store sales advanced an impressive 7.4%, while domestic stores delivered an even better 8.2% comp. Continuing improvement in the housing market was the primary driver of the robust demand the company experienced in the October period, aided by mild weather. Sales were strong across both categories and geographies, with notable recovery in sales to professional customers and large ticket items (kitchens, appliances, etc.). The sales gains were due to a combination of more customer transactions (up 4.0% year to year) and an increase in the average ticket (+3.2%). Additionally, average weekly sales per store rose 7.0%.

Looking further down the income statement, the gross margin expanded slightly (35 basis points), thanks to a variety of factors, including higher productivity, supply chain enhancements, better shrink management, and gross margin accretive businesses acquired last year. Additionally, management kept a tight grip on SG&A expenses (down 179 basis points year to year), which helped to drive total operating expenses as a percentage of sales down 187 basis points. Ongoing stock repurchases ($6.4 billion year to date) also aided per-share comparisons. All told, The Home Depot earned $0.95 a share in the fiscal third quarter, up 28% from the comparable fiscal 2012 period and nicely ahead of our $0.88 forecast.

The Home Depot faces its biggest challenges in the January period, as it is lapping storm-related spending from last year's Hurricane Sandy. The fourth quarter of fiscal 2012 also had an additional week of sales relative to this year. Meantime, the gross margin is expected to contract slightly (about 15 basis points) in the current term, as certain benefits from last year are unlikely to repeat. Regardless, the quarter appeared to get off to a solid start, and ongoing momentum in housing should push sales and earnings higher, despite the above headwinds. All told, we continue to look for earnings of $0.70 a share in the fiscal fourth quarter, in line with management's updated guidance. However, we think that there is more upside than downside to our forecast. For the whole of fiscal 2013, sales will likely climb 5.6%, to $78.95 billion, comps ought to rise 7%, the gross margin will probably expand modestly, and earnings are expected to clock in at $3.72 a share.

Looking to fiscal 2014, we are keeping our sales and earnings estimates unchanged at $82 billion and $4.35 a share, respectively. Rising home prices should prompt consumers to invest in their houses and continue to drive demand for The Home Depot's products. While the macroeconomic backdrop ought to remain supportive, company-specific initiatives such as an expanded appliance selection, the use of technology to improve the in-store experience and integrate online and in-store shopping, supply chain management, and catering to professional customers should all help the retailer to deliver another year of solid results.

As for the stock, it rose modestly on this latest news. We still like this equity for conservative investors looking for exposure to the housing market, but its recent price keeps a lid on long-term price appreciation potential, in our view.

About the Company: The Home Depot, Inc. operates a chain of 2,260 retail building supply/home improvement “warehouse” stores across the United States, Canada, and Mexico. The company's average store size is around 104,000 square feet indoor, plus 24,000 additional square feet in its garden centers. The Home Depot's product lines include building materials, lumber, floor/wall coverings, plumbing, heating, electrical, paint and furniture, seasonal and specialty items, and hardware and tools.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.