Investors have high expectations heading into Home Depot's (HD -0.30%) mid-August earnings report. The retailer is likely to announce market-thumping sales gains thanks to continued strong demand for home improvement products and home building supplies in the first half of 2021.

We'll learn just how well Home Depot managed to protect its market share against rivals like Lowe's (LOW -1.55%). But there are also big questions around profitability and the outlook for the next few quarters. With that in mind, let's look at some metrics to watch for in Home Depot's earnings release on Aug. 17.

A couple paint a room together.

Image source: Getty Images.

Customer traffic

Most investors who follow the stock are expecting sales to rise about 6% to $40.4 billion. Any increase at all should be considered a win given that Home Depot boosted sales over 23% in the year-ago period.

Keep an eye on customer traffic, which was up 19% last quarter. Management said back in late May that shoppers were spending freely on do-it-yourself projects, and on big-ticket items like flooring and appliances. If that trend continued deep into the second quarter, then Home Depot likely notched another market share win against Lowe's and other peers.

As for risks, look for crashing lumber prices to add volatility to comparable-store sales results for the next few quarters. But Home Depot should still maintain industry-leading growth thanks to its world-class multi-channel selling platform.

Profitability swings

The swinging price of lumber is just one reason to keep a closer watch on profitability this quarter. Home Depot also faced surging costs in areas like transportation, labor, and the supply chain. And management is investing aggressively on the fulfillment network after a year that saw it add $22 billion, or 20%, to its sales base.

HD Operating Margin (TTM) Chart

HD Operating Margin (TTM) data by YCharts

"We continue to lean into these investments because we believe they are critical in enabling market share growth in any environment," CEO Craig Menear said in a press release in late February.

That spending might pinch gross profit and operating profit margins this quarter and for the second half of 2021. But the headwind might be almost entirely offset by rising prices and a demand tilt toward premium products.

Looking ahead

The biggest question is whether Home Depot will have optimistic comments about the second half of the year. That update, plus the fresh reading from Lowe's a day later, will give investors a good picture about demand trends more than a year into the historic cyclical surge that's characterized the home improvement market since early 2020.

Risks about slowing economic growth and growing COVID-19 outbreaks might convince Menear and his team to avoid issuing a detailed outlook for 2021, just as they did three months ago. But shareholders will still get a clearer picture of the short-term trends. Management said back in February that comparable-store sales might be roughly flat in the second half of 2021.

But the first-quarter results came in much stronger than expected. A similar outperformance this week might spur Home Depot to change its tune on the third and fourth quarters, likely lifting the stock price in the process. Yet the bigger-picture outlook for the retailer is bright, even if 2021 finishes on a weak note due to pandemic related demand swings.