Growth worries continue to dog Home Depot ( HD). The nation's largest home improvement chain reported strong second-quarter earnings Tuesday, but sales were disappointing. The shares, which have plummeted this year, staged a mild rally. "They had a nice quarter, with nice gross margin expansion despite the promotional environment," said Colin McGranahan, who covers the company for Sanford Bernstein. "The top line, to be honest, was a little disappointing." (He has a market perform rating on Home Depot, and his firm does not do investment banking.) Concerns about how much growth is left to be wrung from the chain will likely continue to weigh on investors' minds, especially if rival Lowe's ( LOW) continues its recent surge. The smaller chain reported a bang-up quarter Monday and remains the favorite of many analysts and investors.
Home Depot reported second-quarter earnings of $1.18 billion, or 50 cents per share, up from $924 million, or 39 cents a share, in the year-ago period. On average, analysts expected the company to earn 47 cents a share, according to Thomson Financial/First Call. Sales came in at $16.3 billion, up 12% from a year ago, but below the close to $16.6 billion analysts had expected. The company's comparable-store sales rose only 1%, below prior projections of a 2% to 4% gain. Looking ahead, Home Depot said it was comfortable with the current consensus earnings estimates for the third quarter and full year, of 40 cents per share and $1.57 per share, respectively. It projected full-year revenue growth of 15% to 18% for the full year, which implies an uptick in sales in the second half of the year. It also forecast comparable-store sales gains of 2% to 4% in the second half. These figures could be tough to reach, say some analysts, given tough comparisons in the fourth quarter and some macroeconomic trends that have raised the specter of a consumer spending slowdown. "I question whether that's realistic or not," says McGranahan. Home Depot shares, which are off some 40% on the year, were up lately $1.29, or 4.4%, at $30.32. The stock's poor performance marks a sharp reversal from the last decade, when the company's strong growth made Home Depot shares among the market's hottest performers. Atlanta-based Home Depot has seen its shares crumble and its valuation sink lower than rival Lowe's this year. The company operates about 1,440 stores; Lowe's operates around 800. On a conference call Tuesday, Home Depot management stressed new efforts, such as catering to professional builders and offering services such as classes to do-it-yourselfers, as key growth initiatives. Management also stressed the large amount of cash -- about $5.9 billion -- on the company's balance sheet. "We want to continue to use our balance sheet to improve our competitive position," said Bob Nardelli, Home Depot's CEO, on the call. Some of its cash was used to buy up several former Kmart locations, he said, and the company is set to implement a previously announced share buyback program.