The Home Depot (HD - Free Home Depot Stock Report), the world's largest home-improvement retailer, reported results from its fiscal fourth quarter today (ended January 30, 2011). The company finished its fiscal year on a high note, as both sales and earnings handily beat our expectations. Sales increased 3.8% (versus our 0.6% forecast) on a 3.9% jump in comparable-store sales (comps were up 4.8% in the United States). Moreover, earnings were $0.36 a share, a nickel above our estimate and up 50% from the year-earlier tally. Increased sales (due in part to consumers making purchases ahead of December 31, 2010 tax credit expirations), a better gross margin, and fixed-cost leverage from higher comps all helped drive the upside to our forecast.

For the whole of fiscal 2010, the company earned $2.03 a share (excluding a $0.02 per share nonrecurring loss) on sales of $68.0 billion. On balance, The Home Depot's results reflected a combination of internal improvements and a gradually recovering economy. Supply-chain management, customer service, and merchandise selection were all keys to the company's success last year. Moreover, sales increased on a year-to-year basis for the first time since 2006, the peak of the housing market. Although housing is still in a fragile state and nowhere near the lofty levels it once attained, it does appear that consumers are increasing their focus on maintenance/repair and home improvement projects. Additional light will be shed on the state of the retail building supply market tomorrow when the world's second largest home-improvement retailer, Lowe's (LOW), reports fiscal fourth-quarter numbers.

The Home Depot will likely deliver more solid results in fiscal 2011. Management guided to sales growth of about 2.5% and a low single-digit increase in comps. Ten new stores are slated to open this fiscal year, and we expect margins to expand slightly. The company indicated that share net will probably be about $2.20 this fiscal year. However, this excludes the impact of share repurchases, and the company is expected to buy back about $2.5 billion in stock. In sum, we are maintaining our $2.25 share-net estimate, though we did increase our sales forecast from $69.15 billion to $69.7 billion.

The retailer is also returning money to shareholders through rising dividends. Indeed, it announced a 6% dividend increase. The quarterly distribution is now $0.25 a share, and the first payment in this amount will be made on March 24, 2011. Additionally, management indicated that its intention is to increase the dividend every year, with a long-term target payout ratio of 40%. Shares of The Home Depot traded modestly higher on the good report.

About the Company: The Home Depot, Inc. operates a chain of 2,248 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, 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.