The Home Depot (HD - Free Home Depot Stock Report), the world's largest home-improvement retailer, has released results from its fiscal 2010 third quarter (ended October 31st). Earnings were $0.51 a share, $0.02 above our estimate and up 24% year to year. Sales advanced 1.4%, slightly below the 1.9% increase we were estimating. Comparable-store sales were up 1.4% in the interim (1.5% in the United States). The increase in comps was driven by a 2.5% jump in customer transactions, offset by a 0.8% decline in the average ticket. The gross margin widened during the period, as did the operating margin, thanks to expense controls and fixed-cost leverage from higher comps.

Despite the earnings beat, the housing market remains weak, and demand for home-improvement supplies is still soft. As has been the case in recent quarters, sales of maintenance and repair items, as well as seasonal products, did well in the October period. However, higher-cost items were still under pressure (as evidenced by the decline in the average ticket), due to the fragile states of the housing and labor markets.

Highlighting the still tepid demand for home-improvement items, management once again trimmed its sales guidance. The company now looks for fiscal 2010 sales to be up 2.2% from the fiscal 2009 tally, down from its previous call of a 2.6% advance. Nonetheless, management added $0.04 onto its share-net forecast, as wider margins and a lower share count should support the bottom line in both the January and full-year periods. All told, we now look for The Home Depot to earn $1.96 a share this year. If achieved, this would be an 18% rebound over the depressed year-earlier number.

The company was able to edge out its archrival Lowe's (LOW), the number two home-improvement retailer, in the October interim. Lowe's earned $0.31 a share in the period (excluding $0.02 a share in nonrecurring items), a penny above our forecast and 29% higher than the year-earlier figure. Sales, however, were below our target. We had looked for top-line growth of 4%, but sales climbed a more modest 1.9% on a meager 0.2% increase in comparable-store sales. It should be noted that smaller Lowe's is expanding its store count at a much faster pace than its larger competitor.

Management trimmed its fiscal 2010 share-net guidance to a range of $1.37 to $1.40 from $1.38 to $1.45. The sales outlook was also reduced, and the company now expects overall sales growth in the 3%-4% range (down from 4%) and a comparable-store sales increase of 1%-2% (down from 2%). Despite the lowered sales increased outlook, our earnings estimates remain largely unchanged, as wider margins and a lower share count should support the bottom line this fiscal year.

About The Company: The Home Depot, Inc. operates a chain of 2,244 retail building supply/home improvement "warehouse'' stores across the United States and in Canada, Mexico, and China. The company's average store size is around 105,000 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, and electrical, paint and furniture, seasonal and specialty items, and hardware and tools.

* This report includes late-breaking news not reflected in our full-page review of this company.


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