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Home Depot's Fed Fortitude

Like its rival Lowe's, the home supply retailer sees a strong 2004.

Updated from 8:12 a.m. EDT

Like its competitor


(LOW) - Get Lowe's Companies, Inc. Report

, home improvement retailer

Home Depot

(HD) - Get Home Depot, Inc. Report

said rising interest rates should have no significant impact on business this year.

Atlanta.-based Home Depot reported a 21% increase in earnings in the first quarter, as sales jumped by more than 16%. The firm also raised its forecast for 2004.

Shares rose 91 cents, or 2.7%, to $34.38 on the news but the stock is still down for the year amid concerns about rising interest rates. On a conference call, executives at the company said they don't expect consumer spending to weaken as a result of tighter monetary policy.


We ran a regression analysis of our sales results against interest rates over a 10-year period," said Carol Tome, chief financial officer of Home Depot. "The analysis showed no statistically significant correlation between the two. Our performance is the result of our efforts."

Home Depot is a different company today than it was the last time the

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was raising rates in 1994 and 1999. The firm has recently made some acquisitions including White Cap Construction Supply, a distributor of hardware, tools and materials, targeting construction contractors. Still, executives don't believe this exposure to the contractor market will negatively impact business.

"We don't see that as an issue," said Chairman and Chief Executive Robert Nardelli. "In spite of economic cycles, consumer confidence, global unrest... we have stayed on strategy."

Home Depot has invested $10 billion into its business over past three years and has grown earnings by more than 20% over the past two years, he added. The firm has also raised its dividend and bought back $4.5 billion worth of stock.

Home Depot reported a 21% jump in first-quarter earnings and raised its full-year estimate. The company earned $1.1 billion, or 49 cents a share, in the quarter ended May 2 compared with earnings of $908 million, or 39 cents a share, last year. Sales rose 16.2% to $17.55 billion.

Earnings in the latest quarter were reduced by an accounting change, excluding which the


component earned 52 cents a share. Analysts surveyed by Thomson First Call had been forecasting earnings of 43 cents a share on revenue of $17.1 billion.

Home Depot said same-store sales jumped 7.7% in the first quarter compared with a year ago, its best such performance for any first quarter in five years. Earnings growth in the quarter was enhanced by cost control: while revenue grew by more than 16%, the cost of goods sold rose by 14.7%.

For all of 2004, the company raised its forecast of 2004 sales growth to 10% to 12%, which comes out to roughly $71.28 billion to $72.58 billion. The Thomson First Call consensus is for 2004 sales of $72.09 billion. The company also raised its estimate of full-year earnings to 10% to 14% from previous guidance of 7% to 11%. Excluding an accounting change, the company sees earnings of roughly $2.12 to $2.18 a share in full-year 2004, compared with the analyst consensus of $2.10 a share.

On Monday, Lowe's issued a similarly strong earnings estimate, with CEO Robert Tillman telling investors on a conference call that "a moderate and measured rise in interest rates, and corresponding mortgage rate increases, will not have a significant impact on our business."

Home Depot cited improved operating efficiencies for its first-quarter performance.

"We continue to build on the momentum created in 2003 by staying focused on our strategy to enhance our stores, extend our business, and expand our markets," the company said, noting that its average individual sale in the first quarter rose by 7.4% to $55.11, a company record. "Our appliance business delivered strong double-digit comparable store sales performance in the quarter, with increases in both units and average ticket."

Home Depot said sales per square foot rose 3.9% to $376.8 in the quarter, its third consecutive quarter of sequential increase in the metric. The company also said services revenue was $800 million in the quarter, up 42% from the year-ago period.