The Home Depot (HD – Free Analyst Report), the world’s largest home-improvement retailer, released results from its fiscal 2010 second quarter (ended August 1st). Earnings were $0.72 a share, directly in line with our estimate and up 12.5% year over year. Sales increased 1.8%, a bit below the 3.2% advance we were looking for, while comparable-store sales climbed 1.7%. Various cost-control initiatives, coupled with better supply-chain management and a scaled back expansion strategy enabled the company to match our earnings estimate despite the revenue miss.

Due to the precarious state of the economy, especially the labor and housing markets, consumers remain in a defensive posture and are somewhat hesitant to engage in large-scale home-improvement projects. Nonetheless, homeowners have been spending on smaller-scale maintenance and repair projects, many of which were delayed during the darkest days of the recession. Appliance sales have also rebounded a bit, thanks in part to government incentives encouraging consumers to upgrade to more energy-efficient models. Moreover, it appears as though maintenance and repair projects should be sufficient to drive positive comps, at least in the near term.

Still, management offered a more tempered top-line outlook for the remainder of fiscal 2010, stating that sales are likely to advance about 2.6% this fiscal year, down from its previous call of a 3.5% increase. On the other hand, cost controls should increase profitability, and the company added a couple of pennies to its share-net guidance. On balance, our fiscal 2010 earnings estimate moves from $1.95 a share (slightly above guidance) to $1.92 a share (in line with guidance).

The Home Depot’s results and outlook were a bit better, though not a far cry, from those of archrival Lowe’s (LOW), the number two home-improvement retailer. Lowe’s earned $0.58 a share in the July period, about 14% higher than the year-earlier figure, but a bit shy of our estimate. Sales increased nearly 4% and comparable-store sales were up 1.6%.

Like Home Depot, Lowe’s sales were buoyed by appliances and maintenance and repair projects, while larger renovations and remodeling were held in check by the uncertain economic outlook. Management now looks for top-line growth of about 4% this fiscal year (down from its prior range of 5%-7%) and same-store sales growth of about 2% (from 2%-4%). In terms of comps, this is similar to what we’re looking for from Home Depot. Lowe’s also narrowed its share-net guidance to a range of $1.38 to $1.45, from $1.37 to $1.47. Like Home Depot, tighter cost controls should support the bottom line, though smaller Lowe’s is expanding at a faster pace than its larger competitor.

While we expect maintenance and repair projects to support positive comps and earnings in the near term, improvements in the housing and labor markets will likely be necessary to sustain longer-term demand.

About The Company: The Home Depot, Inc. operates a chain of 2,244 retail building supply/home improvement ‘‘warehouse’’ stores across the U.S. and in Canada, China, and Mexico. Average store size is around 105,000 square feet indoor, plus 24,000 square feet in its garden centers. The company stocks around 35,000 items. Product lines include building materials, lumber, floor/wall coverings, plumbing, heating, and electrical, paint & furniture, seasonal and specialty items, and hardware & tools.