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Shares of The Home Depot (HDFree Home Depot Stock Report) moved higher after the world's largest home-improvement retailer released fiscal first-quarter (ended May 4th) results that fell short of investors' expectations, but offered an outlook that reassured Wall Street. Management cited lingering inclement weather for creating a slow start to the spring selling season. We noted this in our last full-page report in late March, but the impact was more severe than we had anticipated. Indeed, sales came in at $19.69 billion, a bit below our $20.15 billion forecast. But, this still marked a 2.9% increase from the year-earlier period. Too, comparable-store sales were nicely positive, rising 2.6% company wide and 3.3% in the United States.

Virtually all of the retailer's operating metrics improved on a year-over-year basis. The number of customer transactions climbed 2.2%, the average ticket rose 0.6%, and sales per square foot increased 1.8%. Moving down the income statement, the gross margin expanded just slightly (up five basis points) from the comparable fiscal 2013 period, while selling, general, and administrative expenses fell 57 basis points, partially offset by higher interest costs as a percentage of the top line. A lower share count also aided per-share comparisons. All told, earnings were $0.96 a share in the April quarter (excluding a $0.04 benefit related to the sale of some of the company's equity stake in HD Supply Holdings), up 16% from a year earlier, but a tad below our $1.00 estimate.

Despite the fiscal first-quarter miss, our outlook for The Home Depot has not changed dramatically. Weather sapped about 100 basis points from comps in the April term, and sales in areas of the country where weather was not an issue were quite strong. Moreover, potential sales that were lost in the fiscal first quarter will likely be recouped in the July interim, as homeowners are able to focus on outdoor and garden projects. May comps are tough, but management said that sales trends in the month are “robust”. Also, sales to professional customers have remained strong, big-ticket transactions continue to grow, and core products have seen steady demand (weakness in the fiscal first quarter largely stemmed from seasonal and outdoor products). Online sales, which were up 40% in the fiscal first quarter, and the company's investments in interconnected retail (online, in store, and mobile) should continue to gain steam, as well.

Moreover, management did not seem concerned with recent data out of the housing market indicating that the sector, which was once the sharp end of the spear in the economic recovery, has fallen on somewhat harder times due to an uptick in interest rates and a decline in affordability. We tend to agree, and our sense is that better job numbers and higher incomes will bring more buyers into the fold, albeit unevenly. The company's guidance was virtually unchanged from three months ago, and it still looks for sales growth of 4.8% this fiscal year, adjusted share earnings of $4.38, a 37% tax rate, and flat gross margins. Adding it all up, we have shaved a nickel from our full-year earnings call, which now stands at $4.40 a share, to account for the April-period miss. Finally, we still like HD stock for conservative investors looking for exposure to the housing market. Risk-adjusted total return potential is also favorable at the recent quotation, in our view.

About the Company:The Home Depot, Inc. operates a chain of 2,263 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.