Stimulus Checks Lessen Home Depot Pain

Updated from 9:42 a.m.

Home Depot(HD Quote) on Tuesday reported a sharp drop in its quarterly profit, but the results beat estimates as the company benefited from consumers spending their government stimulus checks.

Home Depot, the country's largest home-improvement retailer, which I have in the Bricks and Mortar mock portfolio, remains a 2009 turnaround story. The company's retail sales have historically correlated with housing sales, which remain weak today.

The company's sales fell 5.4% from a year ago to $21 billion in the second quarter. Sales at stores open at least a year fell 7.9%, or 7.2%, excluding the effect of 2007 having 53 fiscal weeks.

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These same-store numbers were worse than the 5.3% same-store sales decline that competitor Lowe's(LOW Quote) reported Monday. The results show Home Depot may be losing customers to Lowe's in certain markets.

Home Depot's sales were helped by consumers spending their government stimulus checks. This effect should wane in the second half of the year.

Home Depot's earnings fell 25% from a year ago to $1.2 billion, or 71 cents per share. The results beat Wall Street estimates for EPS of 61 cents, according to Thomson Reuters.

Gross margin held steady at 33% in the quarter, while the operating income margin fell to 9.7%, compared with 11.5% a year earlier, as selling expenses remained high.