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Shares of The Home Depot (HD Free Home Depot Stock Report) rose nicely to a fresh 52-week high after the world's largest home-improvement retailer released better-than-expected fiscal second-quarter (ended August 3rd) results and increased its forward-looking guidance. As we expected, sales rebounded from the April period, which was hampered by inclement weather. However, the recovery in the spring seasonal business was clearly stronger than we had anticipated. But, it was not just seasonal items that drove the top line higher, as the core of the store (hand tools, maintenance and repair items, light bulbs, etc.) performed well, along with all geographic regions.

All told, sales climbed 5.7% from a year earlier, to $23.811 billion, modestly ahead of our $23.60 billion call. Even more impressive was the jump in same-store sales, which rose 5.8% overall and 6.4% in the United States, despite a tough comparison in which same-store sales grew 10.7% overall in the same period last year and 11.4% in the U.S. The increase in comps was driven by a 4.2% jump in the number of customer transactions and a 1.8% uptick in the average ticket. Indeed, the company saw ongoing strength in sales to professional customers, along with solid demand for large-ticket items, such as appliances, water heaters, flooring, windows, etc. Also, sales per square foot moved 5.5% higher on a year-over-year basis, while online sales spiked 38%.

A closer examination of the income statement revealed that the gross margin was virtually unchanged from a year earlier (down one basis point), as a variety of headwinds and tailwinds essentially balanced out. However, management was able to keep a tight grip on expenses and reduce workers compensation costs, resulting in a 102-basis-point improvement in selling, general, and administrative expenses as a percentage of sales. Of course, the strong top line growth also helped to leverage expenses. Too, a lower share count aided per-share comparisons, partially offset by higher interest expenses as a percentage of sales and a slightly steeper tax rate (up 13 basis points). Adding it all up, earnings clocked in at $1.52 a share, 23% above the year-earlier tally and $0.07 ahead of our call.

Looking ahead, comparisons will remain challenging in the near term, but management said that it was "very pleased" with August sales thus far. Meantime, housing is apt to stay somewhat mixed, but should still be a modest tailwind in the second half of the fiscal year, as the home improvement market is in recovery mode and home price appreciation remains on the rise. The strong July gain in housing starts should also help. More effective and targeted marketing (due to shift away from print to digital advertising) and good customer service ought to keep shoppers coming to The Home Depot, as well. All told, management expects comps to be about 80 basis points stronger in the second half of the year than they were in the first half, climbing some 4.6% for the whole of fiscal 2014. Total sales are still likely to rise approximately 4.8%, but management raised its earnings-per-share guidance by a dime to account for the outperformance in the July period and lower-than-anticipated expenses as a percentage of sales. The fiscal 2014 gross margin is also expected to expand slightly. We have likewise added a dime to our bottom-line forecast, which, at $4.50, is a couple pennies higher than the retailer's adjusted forecast. Although this stock's price has risen nicely since our last full-page report went to press in late June, discounting some of its long-term appeal, we still view HD stock as a good choice for conservative investors, as risk-adjusted total return potential appears worthwhile, even at the recent quotation.

About the Company:The Home Depot, Inc. operates a chain of 2,264 retail building supply/home improvement "warehouse" stores across the United States, Canada, and Mexico. The company's average store size is around 104,000 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.