Shares of The Home Depot (HDFree Home Depot Stock Report) fell slightly, even as the world's largest home-improvement retailer released better-than-expected fiscal third-quarter (ended October 28th) results and raised its outlook. The top line increased 5% from a year earlier, to $26.302 billion, a hair above our $26.250 billion forecast. Comparable-store sales were up 4.8% overall and 5.4% in the United States. The number of customer transactions rose 1.4% from a year earlier, while the average ticket and sales per square foot notched increases of 3.6% and 5.2%, respectively. Strength was broad based across categories and geographies, with plumbing, electrical, tools, decor, and flooring seeing particularly robust demand.

While the sales performance was impressive, the earnings figure was the real standout from the October interim. Earnings jumped 36% on a year-over-year basis, to $2.51 a share, well ahead of our $2.20 forecast. The gross margin rose 23 basis points, though this was partially offset by SG&A costs, which moved 24 basis points higher as a percentage of the top line. A sharp decline in the tax rate (from 36.9% to 21.4%) was obviously a boon, as was a lower share count.

The company has been facing a number of headwinds in the housing and remodeling markets, such as rising interest rates and higher materials costs, which have resulted in seven-straight months of declines in existing home sales and four-straight months of falling new home sales. While these headwinds are apt to continue in the near term, at least, The Home Depot is executing well, supported by its investments in omnichannel selling capabilities, customer service, and efforts to court professionals. Rising wages, a strong labor market, and rebuilding efforts in the wake of recent natural disasters should also be supportive. Indeed, management's latest guidance calls for full-year fiscal 2018 sales growth of 7.2% (was 7.0%); comps of 5.5% (up from 5.3%); and share earnings of $9.75 (previously $9.42). Our earnings call has moved $0.30 higher to match the $9.75 figure.

Shares of The Home Depot have been a market laggard thus far in calendar 2018 and are trading at a lower level than they were on January 1st. That's not to say that the stock didn't enjoy some success. Indeed, it climbed to an all-time high of $215 a share in September, but October's stock market swoon sent the equity notably lower. The aforementioned concerns about rising interest rates and the state of the housing market also caused investors to take profits. Tariffs on items like appliances and steel have also raised the retailer's costs and contributed to investors' recent trepidation. Indeed, even the strong October-period showing and generally upbeat outlook were not enough to placate investors.

Despite the hurdles the retailer faces, we think that it will continue to execute well. In fact, the recent quotation may entice conservative long-term investors. Recovery potential is attractive, the dividend yield has pushed above the Value Line median, and HD garners our Highest marks for Safety and Price Growth Persistence. The company's Financial Strength score is also top notch, at A++.

About the Company:The Home Depot, Inc. operates a chain of 2,286 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.