Home Depot Q2 profit beats Street but sales disappoint

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Despite a challenging economic environment, sales increased as the retailer offered discounts on a wide variety of frequently used, basic items to offset decline in kitchen renovations and other big ticket projects. A recent UBS survey showed that professional contract work, which analysts claim is a more profitable business for home-improvement retailers than average consumers, has declined in size and pace.

Sales also rose as Home Depot offered attractive discounts on several basic, household maintenance items tied to purchases of Home Depot consumer credit card.

Gross margin also climbed from 33.5 percent to 33.9 percent.

Home Depot CEO Frank Blake said he is encouraged that the hardest hit parts of the US are starting to stabilize and Home Depot has returned to overall sales growth.

On the expense side, SGA (selling, general and administrative expenses) was flat, showing Home Depot kept a tight rein on its expenses.

"They are doing a great job of holding expenses in line on disappointing sales trends," Cowen & Co. analyst Laura Champine said.

Besides putting a tight control over inventory and expenses, Home Depot CEO Frank Blake said the retailer is also in the process of improving customer service and making the stores easier to shop by revamping the distribution system and building regional centers that will deliver products to stores instead of having suppliers shipping directly to individual locations.

"We delivered solid results as we continue to build momentum with our merchandising transformation, supply chain enhancements and customer service initiatives," Blake said in a statement.

Looking ahead, the retailer cut its full-year revenue forecast to $67.9 billion or an increase of 2.6 percent from an earlier 3.5 percent increase, citing uncertain economy. Analysts expected the company to report full-year revenue of $68.21 billion.

However, the retailer raised its earnings forecast to account for share repurchases. It said it now expects profit of $1.90 per share, up from $1.88 per share. Analysts had expected it to forecast profit of $1.89 per share.

Citigroup said Home Depot had repurchased about $700 million in shares during the quarter.

Analysts said Home Depot's financial performance, a barometer of how US homeowners are doing, shows that homeowners are beginning to loosen their purse strings after scrimping on their spending since the credit crisis of 2008.

However, analysts cautioned that consumers are still cautious about starting costly home-improvement projects, as reflected by Home Depot's lower-than-expected revenue forecast.

"Although we believe that Home Depot will continue to benefit from a more stable housing environment, we are somewhat more cautious near term on the home improvement sector, as the ultimate effect of the expiration of the home-buyer tax credit remains unknown," said Merrill Lynch analyst Alan Rifkin in a report. "That being said, we believe that Home Depot will continue to take market share and maintain its position as the leading industry player."

Home Depot's smaller rival Lowe reported earnings, Monday, that missed expectations and cut full-year revenue guidance.

Shares of Home Depot surged nearly 2 percent during pre-market trade after the financial announcement. They closed up 3.40 percent at $28.31.