The United States is finally starting to thaw from the brutal winter, and this couldn't come soon enough for retailers. In addition, the housing market continues to strengthen, evidenced by rising home prices across the country. These tailwinds are combining to provide a great deal of support to Home Depot (NYSE:HD), the biggest home-improvement chain in the U.S, as well as close rival Lowe's (NYSE:LOW).
Home Depot is an amazing story. It's a company that managed to turn in a solid first quarter even in the face of adverse conditions. If you're a Foolish investor looking for a high-quality company with a strong brand and excellent management team, you should get to know Home Depot.
Home Depot's success speaks for itself
Home Depot posted 2.9% revenue growth in the first quarter along with 2.6% same-store sales growth (same-tore sales measure sales at locations open at least one year.) Earnings per share jumped 20% year over year, reflecting the benefits of tight cost controls and an effective share-buyback program.
To illustrate, Home Depot's total operating expenses only increased by 0.5%, far less than its rate of sales growth. And, the company's diluted shares outstanding dropped by nearly 7%, thanks to the $1.2 billion spent on share repurchases in the last three months.
These actions boosted Home Depot's profits in the first quarter, and excellent performance is becoming a habit for the company. In 2013, the company racked up nearly 7% growth in same-store sales, 25% earnings growth, and increased its dividend by 21% at year-end. This was comparable to Lowe's performance last year, which produced 4.8% same-store sales growth and 26% earnings growth. Like Home Depot, Lowe's is very shareholder friends. Lowe's repurchased $3.7 billion of its own stock and paid $733 million in dividends last year. This year, the company plans to buy back $5 billion of its stock.
It's clear that the continued momentum in the housing market and the economy more broadly are lending a helping hand to home-improvement retailers. These trends should continue for the remainder of the year. To reflect this, Home Depot management expects the company to produce 4.8% sales growth and 17% earnings growth, all of which will be made possible by the company's intent to purchase $3.7 billion of its own shares over the rest of the year.
However, Home Depot's results missed Wall Street expectations, and the company took some heat for it in the financial media. Don't be lured into thinking that Home Depot is struggling.
Ignore Wall Street disappointment
After Home Depot reported earnings, most of the attention from the financial media coverage circulated around the fact that the company missed analyst estimates. Revenue missed by about $200 million, and profits came up short by a few pennies per share. But once again, it seems that disappointment over Home Depot's results is only possible with a completely unrealistic view of how the past few months shaped up.
The spring season in the United States has gotten off to an extremely slow start. This has had an undeniable negative impact on retailers. That's especially true for home-improvement retailers, which rely on spring activity for sales. Obviously, analysts should have taken their estimates down a notch or two in light of the fact that brutally cold temperatures persisted well into March and April.
Home Depot Chief Executive Officer Frank Blake acknowledged the winter slowdown, saying in the earnings results that the company was affected by weather. However, he also reaffirmed his outlook for the remainder of the year and insisted the company would hit its guidance. Sales are expected to quickly recover from pent-up demand, and non-weather affected areas of the business continue to look good.
Let Home Depot improve your portfolio
The bottom line is that there's absolutely nothing wrong with Home Depot or its close competitor Lowe's; far from it. In fact, both companies are thriving right now. That's especially true for Home Depot, which wrapped up a great first quarter even with the damage done by the extremely harsh weather. This came after a strong performance last year as well.
Home Depot is growing strong, buys back billions of dollars' worth of its own stock every year, and provides investors double-digit dividend increases annually. Any disappointment from Wall Street over Home Depot is misguided. This is clearly a company with a strong brand and capable management team, and the results speak for themselves.
Bob Ciura has no position in any stocks mentioned. The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.