Earnings

Home Depot beats on earnings, sales; raises full-year EPS guidance

Home Depot beats Street on top and bottom line
VIDEO2:3702:37
Home Depot beats Street on top and bottom line

Home Depot on Tuesday reported sales and earnings that topped analysts' expectations, driven by an increase in both the number of people who made purchases in its stores and the amount that shoppers spent.

As a result, the home improvement retailer reaffirmed its full-year sales guidance, and raised its 2016 earnings per share forecast.

The company's shares rose 1.6 percent, to $129.70, in premarket trading.

Home Depot recorded sales of $23.2 billion in its fiscal third quarter, and earned $1.60 a share, diluted. Analysts had expected the retailer to report earnings of $1.58 a share on $23.05 billion in revenue, according to a consensus estimate from Thomson Reuters. That compares with earnings of $1.36 per share and $21.82 billion in sales during the prior-year period.

Same-store sales rose 5.5 percent, easily topping Wall Street's estimate for a 4.4 percent increase, according to FactSet. In the U.S., comparable sales were up 5.9 percent.

"We experienced balanced sales growth in the quarter driven by an increase in both ticket and transactions, and our continued focus on productivity drove double-digit earnings-per-share growth," CEO Craig Menear said in a statement.

Peter Keith, a senior analyst with Piper Jaffray, acknowledged Home Depot's "solid" results despite a choppy last few months and missed revenue numbers.

"Home Depot really came in across the board with solid results and they were positive in all categories. They saw their sales trend accelerate through the quarter," Keith said on CNBC's "Power Lunch" Tuesday. "An interesting metric they gave was their same store sales growth for large tickets, or tickets that are $900, was up over 11 percent, the strongest growth of the year."

The company reiterated that it expects the year's sales to increase roughly 6.3 percent, with comparable sales rising 4.9 percent. It raised its earnings per share guidance to $6.33, adjusted, from the previous $6.31 a share.

Home improvement retailers have largely managed to buck the challenges facing the broader retail industry, as rising home values and a steadier economy have encouraged consumers to invest in their homes.

Yet as the recovery slowly chugs along, it will make it harder for home improvement retailers to top their year-ago results, making investors more cautious on the space, a behavior that Keith refers to as "buyer's fatigue." Home Depot, in particular, will soon be facing tough comparisons from last holiday season, when a prolonged period of warm weather helped drive its fourth-quarter U.S. same-store sales 8.9 percent higher. And with the company's shares falling nearly 2 percent on Tuesday despite a sales and earnings beat, those fears may be confirmed.

"We think what you're seeing today represents buyer fatigue on the remodel space," Keith told CNBC. "Home Depot shares have outperformed for the last eight years. But they now have two quarters coming up that have difficult same-store sales comparisons, and now with this recent mortgage rate increase, we just think buyers are pausing now to accumulate new shares."

Ahead of the results, investors were also spooked by recent commentary from appliance manufacturer Whirlpool, whose management team reported some softness in domestic demand during its fiscal third quarter. That caused many to wonder whether Home Depot's results would show some cracks during the quarter, Oppenheimer analyst Brian Nagel told CNBC.

"With these results today the answer is clearly no," he said.

Nagel added that although mortgage rates jumped following Donald Trump's election, "they're still very low." Therefore, job growth should outweigh that uptick, he said.

Home Depot's results did get a boost from a lower tax rate, as well as a buyback that resulted in a lower-than-expected share count, according to Jefferies analyst Daniel Binder. Combined, those two factors benefited the company's results by between 3 and 4 cents a share versus expectations, Binder said.

"We believe it could still be a rare outperformer in retail even as the Fed raises rates," he told investors.

Ahead of Home Depot's report, other analysts agreed that the level of investor concern was unwarranted. According to data from the Census Department, home improvement spending grew 7.2 percent in the third quarter, marking a slight acceleration from a 6.4 percent lift in the second quarter, Citi analyst Kate McShane noted in a report to clients.

"Obviously we are getting later in the cycle, and we get the absolute valuation concern, but the demand concern seems overdone," Credit Suisse analyst Seth Sigman echoed in a separate note to investors last week.

Lowe's is scheduled to report its quarterly earnings Wednesday.

Disclaimer: Piper Jaffray makes a market in securities of Home Depot

--CNBC's Rachel Cao contributed to this report.