In an earnings season marked by talk of slowing U.S. growth, Home Depot's (NYSE:HD) second quarter served notice that the housing market remains in good health. The market would have been excused for some apprehension ahead of the earnings report. After all, painting company Sherwin-Williams, which works in an industry closely allied with spending on housing, was forced to reduce its full-year guidance amid talk of "unprecedented rainfall" that reduced end-demand growth in the United States. However, Home Depot raised full-year guidance, and the market promptly took the stock to an all-time high. Let's take a closer look at the earnings.

Home Depot's second quarter
The headline numbers:

  • Second quarter sales were $24.8 billion, just ahead of analyst estimates for $24.7 billion.
  • Second-quarter adjusted diluted EPS were $1.71, matching analyst estimates.

And the guidance:

  • Full-year sales growth of 5.2% to 6% tops the previous guidance of 4.2% to 4.8%.
  • Full-year EPS is slated to fall within a range of $5.31 to $5.36, compared with matching previous guidance and analyst estimates of $5.27.

The second-quarter numbers were pretty much in line, and the guidance increase is impressive. However, don't roll out the bunting just yet, because management made it clear that the increase in sales and earnings guidance is partly to do with its planned acquisition of Interline Brands. That deal is expected to complete in the third quarter.

With that said, the really positive surprise was the upgrading of expectations for comparable sales growth. That's important, as it's a better gauge of underlying growth and because Home Depot has largely completed its store expansion phase -- so the company will rely more on sales growth from existing stores in the future.

In the earnings release, management outlined its expectation that full-year "comp sales will grow in a range of approximately 4.1 percent to 4.9 percent" -- notably higher than the 4% to 4.6% range given at the time of the first-quarter results.

CFO Carol Tome revealed that the quarter got progressively better as it went on. For example, U.S. same-store sales rose 3.5% in May, 5.1% in June, and then 8.2% in July. Moreover, it seems that the positive momentum is likely to carry through into future quarters. "We continue to see positive signs in the housing market," Tome said. "Home prices continue to appreciate, and housing turnover and household formation are now slightly ahead of the assumptions we use to build our plan."

Finer detail
A look at the details reveals a strong quarter as well. For example, Executive Vice President Edward Decker disclosed that the "pro heavy categories continue to show great strength, and we saw double-digit comps in water heaters, power tools, commercial lighting, flooring tools and materials, and power-tool accessories." This is a good sign, because the pro heavy categories tend to be more cyclical, so their strength suggests that the market continues to strengthen.

Furthermore, the weaker sales figures in the quarter came from categories that would have been affected by the rainy weather. For example, the outdoor garden segment was slightly negative, with Decker disclosing that "soils and mulch, live goods, and fertilizers were pressured during the quarter, specifically from weather."

The bottom line
All told, Home Depot delivered a solid set of numbers that were all the more impressive given the weakness that others have reported in the current earnings season. The details suggest that weather had an impact, but the company's underlying performance was strong enough to see the company perform ahead of its plans, and the increase in guidance is a testimony to management's confidence in the housing market in 2015.

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