Investors had high expectations heading into Home Depot's (HD -0.31%) third-quarter earnings report this week -- and they weren't disappointed. The home improvement retailer's sales and profit numbers both beat Wall Street's forecasts. The company also hiked its 2015 business outlook for the third straight time this year.
Market-beating growth
Comparable-store sales spiked higher by 7.3%, which was a surprising acceleration from last quarter's already-strong 5.7% gain. As it did last quarter, management pointed to hefty gains in every aisle of its 2,300 stores. "We saw broad-based growth across our geographies and product categories," CEO Craig Menear explained in a press release.
Image source: Home Depot.
That sales improvement was powered by a huge spike in customer traffic: Home Depot booked 371 million shopping transactions in the quarter, or 4.4% above the prior-year period. Again, that improvement represents a solid acceleration from the second quarter's 3% traffic gain. It also suggests that Home Depot isn't as vulnerable to e-commerce threats as many other retailers are.
Retailing titan Wal-Mart (WMT 0.57%), by comparison, just posted 1.7% higher third-quarter customer traffic -- and its management trumpeted that result as "strong." Sure, Wal-Mart numbers were an improvement over its second-quarter 1.3% traffic gain. But Home Depot is trouncing it, and most other national retailers, by posting 4% higher customer traffic through the first three quarters of 2015.
Rock-solid finances
The financial strength of Home Depot's business model was also on full display in the third quarter. Every major expense category, including cost of sales and operating expenses, rose at a slower pace than revenue. As a result, Home Depot's profitability spiked higher: Gross margin ticked up to 35% of sales from 34% last year. And operating margin soared to 14% of sales from 12% a year ago, setting a new all-time high for the retailer.
HD Operating Margin (TTM) data by YCharts
The company's 12% improvement in net income, combined with a 4% lower share count, produced a 17% jump in earnings to $1.35 per share. Home Depot's profits are running at a 17% higher pace so far this year. And that's a result income investors have to cheer as it suggests another double-digit dividend hike in the offing for 2016. Thanks to those profit gains, along with tight inventory management, Home Depot's operating cash flow has jumped by 18% so far this year, giving the company loads of flexibility to direct excess cash toward its shareholders.
Rising outlook
Looking ahead, management plans to spend $2 billion on share buybacks in the fourth quarter, which will continue to goose per-share earnings. The retailer expects to return a total of $7 billion to shareholders through stock repurchases in 2015.
Meanwhile, Menear and his executive team raised their full-year sales growth target for the third straight quarter. Home Depot entered 2015 targeting 3.9% comps growth, before raising that expectation over the next two quarters first to 4.3%, and then to 4.5%. This week, that comps goal officially moved up to 4.9% -- or just below last year's 5.3% bounce.
