How Home Depot Keeps Building Its Business

Tomorrow, Home Depot (HD -1.77%) will release its latest quarterly results. The key to making smart investment decisions on stocks reporting earnings is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever surprises inevitably arise. That way, you'll be less likely to have an uninformed, knee-jerk reaction that turns out to be exactly the wrong move.

Home Depot joined the Dow Jones Industrials (^DJI -0.11%) in 1999 following a huge rise during the bull market of the 1990s, yet even through the housing boom its stock largely languished. But the company's efforts to improve efficiency eventually paid off during its recent run to all-time record highs. Let's take an early look at what's been happening with Home Depot over the past quarter and what we're likely to see in its quarterly report.

Stats on Home Depot

Source: Yahoo! Finance.

Will investors' optimism pan out for Home Depot this quarter?
Analysts have only grown more optimistic about Home Depot's earnings prospects in recent months, boosting their estimates on the just-ended quarter by a penny per share and adding $0.06 to their full-year fiscal 2013 calls. The stock has moved explosively higher, soaring almost 15% just since mid-February.

Home Depot has definitely set a high bar for this quarter with its past performance. In February, the company announced a 14% gain in revenue and a comparable-store sales gains of 7% in its fourth-quarter results, leading the retailer to boost its dividend by 34% and authorize a $17 billion share buyback. In giving guidance, though, it saw full-year results this year slowing to growth of 3% in same-store sales.

But some investors are concerned that Home Depot's stock has gotten ahead of itself. Essentially, Home Depot's share price anticipated the housing recovery, so it's now up to housing to deliver on the future that shareholders are already taking for granted. Meanwhile, smaller companies in the space have a lot more growth potential, arguably making them more attractive. For instance, last month Lumber Liquidators (LL) reported strong results, with same-store sales rising more than 15% and earnings crushing guidance. Home Depot can't produce anything close to the sales growth rates that will push Lumber Liquidators and its similarly sized peers upward if housing continues to rebound.

One interesting strategic move that came up during the quarter was the possibility that former Home Depot division HD Supply will go public. Home Depot sold the wholesale construction-materials business to private-equity firms six years ago, but Home Depot still retains a 12.5% stake in the venture. Fellow retailer Sears Holdings (SHLDQ) has had mixed success with similar derivative spinoffs: Orchard Supply has plunged, but Sears Hometown and Outlet Stores has seen its shares rise sharply since its IPO late last year. But the timing for HD Supply couldn't be better, and an IPO could produce a nice windfall for Home Depot.

In Home Depot's quarterly report, watch for signs from the retailer that it's working on getting its average revenue per transaction up. Rival Lowe's (LOW -1.40%) has managed to keep its average customer ticket almost 15% higher than Home Depot's, so if Home Depot can find a way to match Lowe's figures, it could hold the key to accelerating growth for its future.

Click here to add Home Depot to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.