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Why Home Depot's Thinking Outside the Big Box

NEW YORK (TheStreet) -- With better-than-expected results coming out from J.C. Penney (JCP - Get Report), the Street has become more optimistic about the long list of retail results due out this week. Chief among them is home improvement giant Home Depot (HD - Get Report), whose first-quarter results come out Tuesday.

The retail giant has benefited handsomely over the past year, after sales were boosted following super-storm Sandy's destruction along the East Coast. Sandy spurred consumers' need to spend on thing to repair their homes. This year the biggest concern has been the weather, which, in the February quarter, Home Depot cited as the main reason for its revenue miss.

Management adjusted quickly, however. With strategic cost-controls and centralizing the company's distribution centers, Home Depot was able to offset the revenue miss with a 4% decline in operating expenses. This led to a 10 basis-point expansion in gross margin and a 7% jump in earnings per share. Analysts were equally impressed with the company's 5% same-store-sales growth in the U.S., which was unexpected, given the inclement weather. On Tuesday, investors are hoping for more of the same.

The Street will be looking for 99 cents in earnings per share on revenue of $19.95 billion, which reflects year-over-year growth of 4% and 19%, respectively. Recent housing data have soured investors' mood about the strength of the U.S. economy. And this has justified lowered estimates over the past three months. But that's not entirely a bad situation of Home Depot. The company should have no problem meeting/beating these targets.

My reason for the optimism is partly due to management's guidance, which called for better-than 4.6% in comparable-store sales for this coming year. To achieve this, management has already implemented strategies to grow ticket and comp transactions during each coming quarter. These include what the company calls its "interconnected retail" strategy.

To that end, Home Depot has opened its first of three new direct fulfillment centers, think Amazon (AMZN), which will be used to ship products directly to consumers. These fulfillment centers will co-operate with the company's already-established 2,000 U.S. locations to simplify the shopping experience. Not to mention, they will give customers the convenience to shop online and pick up or exchange their products at the store.

And when you factor in that these facilities give Home Depot the capability of same-day shipping, Home Depot is obtaining the same advantages that Amazon has enjoyed since its inception. The company's interconnected retail strategy was also the reason behind Home Depot's acquisition of Blinds.com, the market leader in online window coverings.

Management believes that Blinds.com will help Home Depot deliver best-in-class capabilities to sell various customizable products online. It remains to be seen how well Blinds.com fits into the Home Depot culture of traditional retail. But in terms of flexibility, it's nonetheless encouraging that Home Depot has begun to think outside the realm of the big box.

This raises questions about what rival Lowe's (LOW) will do to keep up with Home Depot's moves. While both companies have produced solid stock returns over the past couple of years, Home Depot has been the clear-cut winner in terms of operational performance. Lowe's report earnings Wednesday. And it should be fun to dissect the metrics where they diverge. 

With a management team that is unafraid to take risks, Home Depot remains one of the best companies in the entire market. I would be a buyer here ahead of the earnings report, and expect the shares to offer a 15% premium in the next 12 to 18 months. 

At the time of publication, the author held no position in any of the stocks mentioned.


This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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