The world’s biggest home-improvement retailer, The Home Depot, Inc. (NYSE:HD), recently reported quarterly results that were well above market expectations. Its closest competitor, Lowe’s Companies, Inc. (NYSE:LOW), also posted strong results as these two stocks continue their rally on the back of a housing recovery. The latest new home sales data was disappointing, but the long-term outlook remains positive.
The Home Depot, Inc. (NYSE:HD)’s net sales increased by 9.5% year-over-year to $22.5 billion, while net earnings rose 17.2% to approximately $1.8 billion, or $1.24 per share. The company managed to beat both revenue and EPS estimates by $780 million and $0.03 per share, respectively . Comparable-store sales were extremely strong–the year-over-year increase was 10.7%, as opposed to analysts’ estimates calling for a gain of 7% to 8% .
The Home Depot, Inc. (NYSE:HD)’s CEO Frank Blake has attributed an uptick in consumer sales, as opposed to the more traditional professional-contractor sales, as one of the reasons behind The Home Depot, Inc. (NYSE:HD)’s better-than-expected performance .
While the housing recovery has played its part, The Home Depot, Inc. (NYSE:HD)’s management has also done an excellent job in terms of cost discipline. Net sales rose 9.5%, but the selling, general and administrative expenses increased by just 5.6% to $4.3 billion. As a result, The Home Depot, Inc. (NYSE:HD)’s net profit margin improved by 52 basis points from the corresponding quarter last year to slightly less than 8.0%.
Home Depot increased its FY 2013 EPS and revenue growth guidance from $3.52 per share on 2.8% growth to $3.60 per share on 4.5% growth. On the other hand, the markets are expecting EPS of $3.65 per share.
Meanwhile, Lowe’s Companies, Inc. (NYSE:LOW) recorded a 10.3% increase in sales to $15.7 billion, while net earnings rose 26% to $941 million, or $0.88 per share. Lowe’s Companies, Inc. (NYSE:LOW) same-store sales have trailed Home Depot’s with growth of 9.6%. Like its bigger rival, Lowe’s has also outperformed the market’s consensus estimates. The company similarly raised its annual guidance, and now expects 5% sales growth with EPS of $2.10.
There are risks associated with high unemployment numbers and increasing mortgage rates, which could slow the housing sector’s recovery. By mid-August, the rate on a 30-year fixed loan reached nearly 4.7%, one of the highest levels in two years . The increase in borrowing costs can have an adverse impact on home resales.
But analysts believe if that happens, then both Home Depot and Lowe’s will be better positioned than home builders, such as Toll Brothers or PulteGroup . This is because Home Depot and Lowe’s primarily serve the home-improvement sector, not the home-construction sector, which could be the biggest casualty of a housing slowdown.