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The Home Depot (HDFree Home Depot Stock Report), the world's largest home-improvement retailer, has reported fiscal first-quarter (ended April 29th) results that beat our conservative estimates. While earnings were in line with investors' expectations, the top line fell shy of the average forecast. The bears pounced on this news, and even increased guidance was not enough to keep them at bay. Consequently, the stock fell back modestly in early morning trading.

Excluding a $0.03-per-share nonrecurring gain related to the termination of the company's guarantee of a senior secured loan, share net was $0.65, in line with the consensus estimate. The tally was a nickel above our outlook, however, and 30% higher than the year-earlier figure. Sales of $17.8 billion rose 6%, year over year, and beat our $17.6 billion call, but the majority of investors were looking for something between $17.9 billion and $18.0 billion. Comparable-store sales climbed 5.8%, with stores in the United States posting a 6.1% increase, both of which were better than expected. Mild winter weather across much of the country (especially in northern regions) spurred demand for The Home Depot's products, as people got an early start on outdoor and seasonal projects. The number of transactions during the April term rose 3.9%, while the average ticket registered a more subdued advance of 2.2%. In terms of profitability, the gross margin improved by eight basis points, year over year, to 34.72%, due to supply-chain improvements. The bottom line also got a boost from lower operating expenses as a percentage of sales (a 109 basis point improvement), thanks to decreased depreciation and amortization expenses and SG&A spending restraint, as well as a reduced share count.

Looking ahead, management increased its fiscal 2012 guidance, though its core assumptions were little changed. Indeed, the improved guidance was largely reflective of the solid fiscal first-quarter results, partially offset by July-period sales that were pulled forward because of the weather. Still, management's outlook is upbeat, in our view. Indeed, it now sees sales rising about 4.6% this fiscal year, up from its previous forecast of a 4.0% advance. The company also increased its earnings-per-share estimate to $2.90 (though this includes the $0.03 nonrecurring gain discussed above), from $2.79. Given these developments, we now look for the retailer to earn $2.87 a share (representing a 16% year-over-year advance) on sales of $73.65 billion, up from our previous calls of $2.80 and $73.40 billion, respectively.

Overall, we think The Home Depot had a pretty good quarter and that this morning's selloff is a bit over blown. Guidance is largely reflective of broad GDP growth and does not assume material improvement in the housing market. We believe that this segment of the economy will recover at a measured, albeit uneven pace, which could add to the bottom line in the coming few years. More details on the company's longer-term business plans and expectations should be available at The Home Depot's investor conference on June 6th, and we will have to wait until May 31st to see how its primary rival, Lowe's (LOW), fared during the April term. For the time being, however, we continue to view these shares as a good core holding for conservative accounts, though capital appreciation potential is still below the Value Line median.

About the Company: The Home Depot, Inc. operates a chain of 2,254 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.