Home Depot Dodges Distress

Investors seemed to feel quite at home with Home Depot (NYSE: HD  ) after it reported second-quarter earnings, despite the company's warnings of a challenging second half to the year. Furthermore, there was additional reason for investors' relief, given the subsiding of some of Home Depot's recent controversy.

Home Depot reported second-quarter earnings up 5.3% to $1.86 billion, or $0.90 per share. Sales increased 16.7% to $26 billion. In a noteworthy development, Home Depot reported same-store sales down 0.2% in its retailing unit. It's not just interesting that comps slipped -- it's very interesting that Home Depot reported the metric at all.

After all, last quarter Home Depot said it no longer planned to supply same-store figures, joining what seemed like a dangerous trend. Long-term investors should be relieved that Home Depot seems to have reconsidered its stance on comps, especially after several public-relations fiascoes last spring made the company look decidedly unfriendly to shareholders. (My Foolish colleague Rich Duprey argued at the time that Home Depot gave investors good reason to consider bailing out.)

Wall Street looked favorably on Home Depot, bidding its shares up a few percentage points, even though the hardware retailer predicted challenges in the second half of the year. Those storm clouds are hardly a surprise; there are increasing signs that the real estate market is cooling down, and new data released today showed that several once-hot home markets have been hitting the skids. If the housing market tanks, and consumers lose much of their incentive to make home improvements in anticipation of a profitable sale, growth for retailers like Home Depot and Lowe's (NYSE: LOW  ) might suffer.

Although Home Depot said that its sales and earnings will come in at the low end of previous guidance, investors took the news in stride -- though other retailers have recently gotten hammered for the same sort of news. Maybe investors were also relieved that Home Depot didn't pull a Wal-Mart (NYSE: WMT  ) ; the discounter reported a lower quarterly profit for the first time in a decade.

Granted, Home Depot is trading at fairly low multiples at the moment, but on the other hand, the company itself admits it's facing a difficult year, and the residential real estate situation implies that recent years' heated drive for home improvements may soon cool. Meanwhile, investors have plenty of reasons to keep monitoring Home Depot's management. At the moment, the hardware chain seems more like one to watch than one to buy.

We've hammered out further Foolishness:

Home Depot and Wal-Mart areMotley Fool Inside Valuerecommendations. To find out what other companies Philip Durell has recommended for investors who are on the lookout for bargains, click here for a 30-day free trial.

Alyce Lomax does not own shares of any of the companies mentioned.


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