Home Depot Builds Caution

Updated from 7:19 a.m. EDT

With a slowdown in the U.S. housing market at hand, Home Depot's (HD Quote) second-quarter results soothed investors' fears of broader trouble for the home-improvement chain. The company showed caution, though, in its forecasts for the rest of the year.

The retailer reported higher-than-expected earnings Tuesday and announced it will beef up efforts to fight off competitive threats. Investors, who have sent Home Depot's stock down more than 10% since the start of June, bid the shares up $1.19, or 3.6%, to $34.45 in recent trading.

The Atlanta-based company said it earned $1.86 billion, or 90 cents a share, for the quarter ended July 30, up from the year-ago $1.77 billion, or 83 cents a share.

Excluding a latest-quarter charge on retroactive Canadian taxes, earnings were 93 cents a share, a penny ahead of the Thomson First Call mean analyst estimate. Sales rose to $26.03 billion from $22.31 billion a year earlier, beating the $25.5 billion target.

After receiving a barrage of criticism from Wall Street last quarter about its decision to stop reporting same-store sales, Home Depot reversed itself this time around. Not surprisingly, the report showed a decline. Its same-store sales, or comps, were down 0.2%, showing the pressure of a softening housing market and intense competition from Lowe's (LOW Quote).

"The impact of housing appears to be gradual, rather than severe, but it is eating into sales," said Goldman Sachs analyst Matthew Fassler in a note to clients.