Why Home Depot's Guidance Was 'Conservative'

Home-improvement retailer Home Depot Inc (NYSE: HD) reported better-than-expected second-quarter results. Same-store sales were up 6.3 percent, with the U.S. same-store sales up a steeper 6.6 percent.

The company raised its full-year adjusted earnings per share.

Commenting on the results, Stifel said the company has provided a conservative guidance. Accordingly, the firm raised its second-half assumptions and 2017 earnings per share estimate to $7.35, above the company's guidance range.

Analysts John Baugh, Dillard Watt and Paul Betz said the company's conservative guidance came in as a surprise for some investors, sending the stock lower Tuesday. The fact that the muted guidance came despite the solid quarter made the guidance even more conservative.

Stifel noted second-quarter comp growth of 6.3 percent came in ahead of the company's guidance and the consensus, with both traffic and ticket contributing to the upside. All geographic regions and top metro markets experienced positive comp growth, the firm noted.

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The firm also said Pro sales and large ticket growth continued to outpace overall business, suggesting improving demand picture, as they are less influenced by commodity costs or weather comparisons.

Additionally, the firm noted that Online sales were up 23 percent, accounting for 6.4 percent of the sales in the second quarter. The firm also referred to the management comment that the brick-and-mortar and online channels are interconnected, with over 40 percent of the orders picked up in the store.

"We continue to believe that while there is a meaningful percentage of product (25-30%) that is theoretically susceptible to online competition, there are meaningful moats around the traditional retail model, particularly for HD with such a large portion of pro business," the firm added.

Outlining the positive macro picture, Stifel noted that the company spoke about the aging housing stock on the call, with annual spend on older homes being roughly double that of a newer home. Also, there has been growth in the percentage of first-time buyers and housing starts, the firm said.

Stifel reiterated its Buy rating on the shares of the company and its $178 price target.

The firm attributed the rating to the company's continued demonstration of executing operational improvements while delivering strong top line growth. The firm believes sales growth is coming from a combination of some share gains in a more consolidated industry as well as macro tailwinds from a variety of housing-related factors as the overall home improvement industry continues to grow in the mid-single digits.