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Summary

  • Despite high expectations for the quarter, Home Depot not only matched forecasts but delivered higher than expected numbers, sending shares rising for the day.
  • While some of this increase was driven by higher comparable store sales, the retailer boasted a big rise in traffic, indicating a progressively healthier economy.
  • Moving forward, the retailer has potential, but with its retail footprint no longer focusing on growth, investors shouldn't expect to get rich over night owning the company's stock.

Shares of The Home Depot (NYSE:HD) rose 6% on Aug. 19 after news broke that the home improvement retailer saw revenue and earnings rise year-over-year, handily outperforming forecasted results. Although the amount paid per transaction rose for the quarter, the big driver behind comparable store sales appears to be the company's traffic, which demonstrated that more consumers are fixing up their homes, a very bullish sign for the economy.

Home Depot saw a little growth spurt

Despite calls from management that the age of increasing its store count are over, Home Depot posted strong sales growth as more consumers are spending more money at its outlets. For the quarter, the company reported revenue of $23.81 billion. This represents an almost 6% jump in sales over the $22.52 billion management reported the same quarter last year and came in slightly above the $23.61 billion analysts anticipated.

Earnings Overview
 Last Year'sForecastedActual
Revenue (billions)$22.52$23.61$23.81
Earnings per Share$1.24$1.45$1.52

According to management, this rise in sales was driven largely by a 6.4% rise in comparable store sales. This, in turn, can be attributed to a 1.8% rise in average ticket price (the price paid by a customer per transaction) which inched up from $57.39 to $58.43 but another big contributor appears to be a jump in the number of transactions, which soared 4.2% to 409.7 million from the 393.2 million seen in the second quarter of 2013.

On an earnings front, the situation was even better. For the quarter, management reported earnings per share of $1.52. This represents a 23% increase over the $1.24 reported by management last year and was nearly 5% higher than the $1.45 Mr. Market hoped to see. While some of this increase was driven by higher revenue, Home Depot also benefited from a decline in its selling, general and administrative sales from 19.1% of revenue to 18.1% and a 6% drop in share count from 1.44 billion shares to 1.35 billion.

Takeaway

With recent reports coming out claiming that housing construction is on an upswing, it's no wonder that Home Depot is doing well. While this is a bullish indicator for the retailer, investors should also understand that comparable store sales can only rise by so much. Because the company has decided to curtail its store development, much of its future growth will have to come from online sales. That being said, these numbers and the business's share price performance suggests that things have a potential to get better down the road, but not likely much better as it's in a highly cyclical industry in a very mature market.

Source: Home Depot Soars On Great News