Home Depot (NYSE:HD) is just starting to see the benefits of higher construction spending. As homebuilding continues higher, contractor business is starting to climb. And that weakness offers a nice chance for investors to buy this retailer ahead of the spring season.
Home Depot entered Q4 with strong tailwinds.
Last quarter, the company's sales climbed 4.6% to $18.1 billion as comparable store sales increased 4.2%. Net earnings were up 23.3%. Across the nation, the strongest categories were lumber, decor, kitchen, paint and lighting.
The strength allowed the company to boost full year sales and earnings guidance to 5.2% and 18%, respectively.
Sales were helped by traffic -- transactions were up 1.7% -- and ticket size -- average ticket size increased 2.9%. Although 70 basis points of the ticket size growth came from lumber inflation, bigger tickets mean more people are spending more money.
Additionally, while small ticket growth was flat, big tickets -- those of $900 or more -- rose 4.3%. Consumers are opening their wallets, putting money to work buying appliances, flooring and kitchens. This means the corner may finally be turning for contractors, whose thicker wallets should yield higher tool sales.
Importantly, across Home Depot the troubled southern housing market was among the strongest regions last quarter, with Florida improving sequentially. Troubled California also grew above the chain average. As employment improves in these key markets, housing markets will support additional revenue growth.
In the Northeast, where sales were a bit weaker, Hurricane Sandy added a big boost in the final week of the quarter as people stocked up on plywood and generators. This strength likely continued into Q4 and will likely accelerate in 2013 as insurance payments are put to work.
At the same time sales are growing, Home Depot is holding the line on costs. SG&A as a percentage of sales came in flat at 22.8% while capital expenditures fell 4.3%.
The strength continues to support shareholder friendly dividends and buybacks. Heading into Q4, the company forecast it would spend an additional $700 million repurchasing shares. This would bring their full year total spent on buybacks to $4 billion.
Housing data continues to support 2013 growth opportunity.
Nationally, new home sales increased 15.3% year-over-year in November as supply fell to 4.7 months from 5.7 months. Existing home sales, which rose 14.5% from last year, reached a 2.5 year high in November. This was their third consecutive month of higher signed contracts (National Association of Realtors).
More home sales helped median prices climb 10.1%, which marked the ninth consecutive month for year-over-year price growth. This pricing trend should continue given total home supply stands at its lowest since 2005. And time on the market fell to 70 days, 28.6% fewer days than a year ago.
Adding additional support to Home Depot -- as well as other plays including Lumber Liquidators (NYSE:LL) and Lowes (NYSE:LOW) -- is overall construction activity. In October, construction spending increased 9.6% from a year ago and through the first 10 months construction spending is up 9.3%.
Lumber transported across U.S. railways remains bullish for builders too. In the week ending December 22nd, U.S. lumber rail carloads were up 27.3%, bringing year-to-date growth to 13.4%.
If this strength carries forward into next year, it's likely we'll see analysts boost their expectations, providing additional support. That could mean shareholders using the recent 6% slide to add to positions get nicely rewarded.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in HD, LL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.