Home Depot Report Sturdy

The retailer blows out the fourth quarter, and recent acquisitions should add to growth.
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Updated from 7:24 a.m. EST

Another round of stellar quarterly results from

Home Depot

(HD) - Get Report

showed no cracks in the company's foundation.

The leading home improvement retailer reported Tuesday that its fourth-quarter profit rose 23% to $1.29 billion, or 60 cents a share, from the $1.04 billion, or 47 cents a share a year earlier. Analysts on Wall Street were expecting earnings of 56 cents a share, according to average estimates reported by Thomson First Call.

Home Depot's fourth-quarter sales increased 16% to $19.49 billion from last year's $16.81 billion, while same-store sales rose 5.5%.

Home Depot's chief financial officer, Carol Tome, said on a conference call that the sales momentum led the company to raise its 2006 revenue guidance to a range of 14%-17% growth, while earnings still are expected to rise 10% to 14%.

At the midpoint of those ranges, the guidance would put this year's total sales at $94.5 billion and earnings at $3.05 a share. Both results would beat Wall Street's projections. Analysts are currently expecting annual sales of $91 billion, with earnings of $3.03 a share.

"Overall, this is a very strong company operating in a very sweet spot of the market," says Craig Johnson, president of Customer Growth Partners. "This entire home improvement category continues humming along."

Despite the strong performance, Johnson says Home Depot's small rival,

Lowe's

(LOW) - Get Report

, appears to be outperforming on a sales and merchandising basis. (Johnson owns shares of Home Depot and Lowe's, but his firm does not do any investment banking.)

Lowe's will report its earnings next Monday, and analysts' estimates are calling for earnings of 79 cents a share, up from the 54 cents a share the company earned a year earlier.

Lowe's has a bit over half the store count that Home Depot does, and has larger growth potential in domestic markets. Home Depot has been focused on overseas markets for growth, as well as making acquisitions, such as its purchases of

Hughes Supply

(HUG)

and Chem-Dry, in order to expand into new businesses.

Home Depot agreed in January to buy Hughes Supply, a wholesale distributor of construction and repair products, in a deal valued at about $3.47 billion. Home Depot's current supply business represents about 5% of the company's sales.

"The Hughes acquisition will ramp up that business significantly," Johnson says. "That could open up a whole new ballgame for

Home Depot if they are able to serve the needs of the many private contractors that operate around the country."

Tome said the supply business is expected to have 2006 sales of around $12 billion, with the Hughes Supply purchase expected to close in April. Meanwhile, the Chem-Dry acquisition received little attention Tuesday, and Johnson says that may reflect uncertainty about how the purchase of the carpet-cleaning franchisor will play out.

"Chem-Dry is a completely different animal from the Home Depot retail business because it is a franchise business," Johnson says. "This creates a new uncertainty. It is materially a different kind of business with different numbers and metrics and so forth, so it remains to be seen how this will play out."

Chem-Dry has nearly 4,000 franchises worldwide, including 2,500 in the U.S., and it services 10,000 homes every day.

Home Depot's fourth-quarter gross margin narrowed to 33.8% from 34.2%, the company said, citing a rise in appliance sales in its product mix. Selling costs fell to 21.2% of sales from 22.3%.

"If they're moving up market in appliances they shouldn't be losing margins," Johnson said. "Are they increasing share at the expense of profitability? There may be an issue there that they haven't talked about."

Morningstar analyst Anthony Chukumba was encouraged by the retailer's ability to leverage the selling costs.

"That points to higher productivity in their stores," Chukumba says. "It appears that all the investments they've made in their stores, like the self-checkout registers and other things they've been doing at the back end, are paying off."

Home Depot shares recently were up 9 cents, or 0.2%, to $41.95.