Home improvement giant Home Depot (click ticker for report: ) reported strong second quarter results Tuesday morning. The firm generated sales growth of 1.7% to $20.6 billion, roughly in-line with consensus estimates and powered by 2.1% same-store sales growth. Earnings grew 17% year-over-year to $1.01 per share, slightly higher that the Street predicted. The company also increased its earnings outlook for the year to $2.95 per share from $2.90 per share, though revenue guidance remains unchanged, predicting 4.6% growth.
Though a bevy of factors negatively impacted the second quarter, we thought results were relatively strong. Drought throughout the United States discouraged lawn care, according to management, and a lot of business was pushed into the first quarter thanks to the unseasonably warm weather. Still, US same-store sales grew 2.6%. Management also thinks the housing market is turning around—particularly in hard hit regions like Florida and California.
Though gross margins increased by just 20 basis points to 34.1%, the firm was able to slash SG&A costs by $120 million compared to the same period a year ago. We suspect the firm will be able to leverage SG&A going forward, helping the earnings picture remain intact. We’re anxious to see if rival Lowe’s (click ticker for report: ) will be able to replicate results, though its operating margins have not expanded at the same rate as Home Depot’s. Earlier today, Valspar (VAL), Lowe’s paint supplier, reported double-digit order growth due to demand from Lowe’s, so perhaps growth at the home improvement retailer will be stronger than expected. Additionally, we have no reason to believe that Lowe’s revenue pace will meaningfully lag Home Depot’s rate of top-line expansion, though we note the firm is losing share.
Nevertheless, we’re not fans of either retailer at current levels, as we feel both are fairly valued. Neither ranks highly on our Valuentum Buying Index (our stock-selection methodology), nor does either firm have a dividend yield in excess of 2.5%, making the stocks relatively unattractive as dividend-growth investments. Still, Home Depot’s strong results speak positively to US economic activity and the housing market.