(By Mani) One of the more interesting data points from Home Depot, Inc.
) was that for the first time in several years, the impact of the housing market has turned from a negative to a positive. Not only is housing now positively contributing to GDP growth, but also helping to fuel continued solid pro customer trends.
This makes Home Depot, the World's largest home improvement retailer, an excellent theme to play in the housing market recovery as it should be able to gain market share and benefit from even modest housing industry improvement, while leveraging its expenses on low same store sales growth.
In addition, Home Depot has the potential to experience acceleration in sales growth as the housing market recovers in a more material way.
During the second quarter, transactions for tickets over $900 were again in the mid single digit range for larger pro customers and the company's services business comped up in the double digits on better kitchen installation results.
"Private fixed residential investment as a percent of GDP improved y/y in 2Q12 and trends in California and Florida improved sequentially and were amongst the best regions in the country," Deutsche Bank analyst Mike Baker said in a client note.
Home Depot has called out California and Florida many times over the last several years. In the earlier stages of the housing downturn, these markets were the company's worst performing markets.
Weak housing prices in those markets caused households in those areas to defer home-related spending more than in other parts of the country. However, over the last two years, the housing markets in California and Florida have generally stabilized, and at times performed above the total company comp.
"This makes inherent sense to us because these markets are coming off of a far lower base and should thus have more room to rebound," RBC Capital Markets analyst Scot Ciccarelli wrote in a note to clients.
This suggests though the home improvement market continues to slowly edging higher, most of Home Depot's sales are still concentrated in basic repair and remodel merchandise rather than big-ticket discretionary products. However it appears to be gaining sizable market share in kitchen projects.
"We continue to believe the improvements in the housing macro environment that we've seen over the last year should be a positive backdrop for Home Depot," Ciccarelli noted.
In addition, the increase in big ticket sales suggests that Home Depot could be gaining market share gains with professional contractor customers. Going into this quarter, Home Depot had consistently generated better same store sales growth than Lowe's (NYSE:LOW) over the past year and a half.
"While trends in customer transaction count at the two retailers have been relatively consistent, the growth in average ticket has not (HomeDepot's has been better)," Ciccarelli added.
Home Depot has managed to report decent second quarter numbers despite modest growth environment amid weather-related pull forward of sales into first quarter from second quarter. Net earnings increased 12.4 percent to $1.53 billion, and earnings per share climbed 17.4 percent to $1.01, topping Street view of 97 cents per share for the quarter. Sales for the recent quarter edged up 1.7 percent to $20.57 billion, while analysts were looking for $20.74 billion.
Comparable-store sales for the second quarter grew 2.1 percent, and comparable sales for U.S. stores advanced 2.6 percent. Further, the company was able to generate significant earnings leverage on this low single digit comp.
Home Depot also raised its full-year earnings view by 5 cents to $2.95 per share, while continues to forecast sales growth of about 4.6 percent. Wall Street analysts, on average, currently expect earnings of $2.94 per share on a 5 percent revenue increase that calls for sales of $73.92 billion.
"Given its U.S.-centric model, strong earnings leverage and cash flow generation, and upside potential from its positioning within the U.S. economy/housing market, we remain buyers of HD shares," Ciccarelli said.