Home Depot (HD) reported solid second-quarter results Tuesday that revealed a strong rebound in its seasonal business and strength in its core categories (hardware, building materials, and electrical), despite the sluggish housing recovery. We like the name better than peer Lowe’s (LOW), but don’t feel diving head first into a housing market play is best at this point in the economic recovery.
Home Depot’s sales jumped over 4% from the same quarter a year ago on a similar percentage jump in global comps, while earnings per diluted share expanded nearly 20%, a very impressive growth number. Operating income increased 12% and net earnings increased over 14%, so we were quite pleased with Home Depot’s ability to leverage sales expansion in solid performance on the core operating and net lines. The number of customer transactions bumped up 1.1%, while the average ticket increased about 3% during the period—meaningful improvement even from the first quarter of this year. Given this strong showing, the company now expects earnings from continuing operations to jump 16% for the full year, to $2.34 per share (was $2.24).
We think most of this strength is coming at the expense of rival Lowe’s (LOW), which in contrast cut its full-year outlook and revealed negative comps in the same calendar quarter, and the firm’s strategic focus on distribution and customer service. According to the company’s independent third-party tracking of consumer activity, Home Depot gained unit share in 5 of 13 departments during the second quarter: flooring, plumbing, electrical, lighting, and kitchens. Home Depot also noted that all but three of its top 40 markets experienced positive same-store sales in the quarter (with particular strength in its Midwest and South Atlantic regions) and said that comps into August are performing nicely, something that reinforces our view that we are not heading into another painful recession.
That said, the firm did stress that the housing market remains under pressure and that private fixed residential investment as a percentage of GDP continues to set 60-plus year lows near 2%. We’d wait for further confirmation that the housing sector has stabilized—the firm doesn’t expect any meaningful improvement in the housing market in the back half of 2011–before diving into Home Depot’s shares.