Home improvement giant Home Depot (click ticker for report: ) kicked off fiscal year 2013 with a strong start. Revenue rose 7% year-over-year to $19.1 billion, soaring past consensus expectations. Earnings also easily exceeded consensus estimates, growing 22% year-over-year to $0.83 per share. Free cash flow improved 7% compared to the prior year period to $2.4 billion.
In spite of facing a difficult weather comparison, same-store sales were 4.3% higher on a comparable basis, with US same-store sales up 4.8%. The company received some benefit from ongoing demand from rebuilding efforts resulting from Hurricane Sandy, but we believe the broad based strength underscores the resiliency of the housing market in the US. Also helping to boost results was a shift towards Pro-level business, meaning homeowners are feeling more comfortable spending money on contractors rather than “do-it-yourself” projects. We believe this development could have implications for the broader economy, since contractors have been in a deep recession for several years now (an increase in contracting activity speaks to even more confidence in the housing market recovery). And with contractors getting back to work, we could see a more pronounced growth in employment.
Appliances also helped drive some of the sales gains at Home Depot, accounting for 70 basis points of the same-store sales growth rate. This is consistent with what we saw from Best Buy (click ticker for report: ), which posted a 7.2% same-store appliance sales gain during its first quarter, and hhgregg (HGG), which registered a 4.6% same-store appliance sales gain. We continue to believe pent-up demand for appliances is strong, and it looks like Home Depot, Best Buy, and even Amazon (click ticker for report: ) are likely to be winners, leaving former appliance heavyweight Sears (click ticker for report: ) in the dust.
With the increase in appliance sales and higher ticket items, gross margins during the quarter expanded 20 basis points to 34.9%. April same-store sales jumped 10% compared to the prior-year period, and we think the shift towards higher-margin items could help boost total gross margins above 35% for the full year. As sales advanced at a brisk rate, the firm was able to leverage fixed costs, with SG&A declining 100 basis points year-over-year to 21.9%. Achieving sales leverage for the full-year seems manageable, in our view.
Looking ahead, the company raised its full-year same-store sales growth guidance to 4%, driving a 2.8% sales gain for the full-year (one extra week in fiscal 2012 depresses the number). Earnings per share for the year are expected to grow 17% to $3.52 per share, up from its previous outlook that called for 12% expansion. Given the strength of the firm’s first quarter results, our conviction in the US housing recovery continues to grow. We plan to update our report on the home-improvement retailer soon.