Despite beating analysts' first-quarter expectations on Tuesday, HomeDepot's ( HD)turnaround story still appears to be a work in progress.

The home improvement retailer exceeded consensus estimates by 2 cents ashare. But analysts had set the bar fairly low. Meanwhile, the companyreported slow sales growth and a large jump in inventories.

"We accomplished a lot in this quarter, but I would be very quick to saythat we still have much to look forward to this year," said Bob Nardelli,Home Depot's CEO, on a conference call.

For the quarter, Home Depot earned $907 million, or 39 cents a share. Ona per-share basis, earnings increased 8.3% from the $856 million, or 36 centsa share, the company earned in the year-ago quarter.

Overall sales increased 5.8% year over year to $15.1 billion. On asame-store basis, which compares results at like outlets open more than oneyear, sales fell 1.6%.

Analysts had been expecting earnings of 37 cents on $15.05 billion insales, according to Thomson First Call. Home Depot had not given guidancefor the first quarter, but had previously said it expected its full-yearearnings to grow 9% to 14% over last year on sales growth of 9% to 12%. Thecompany reiterated that guidance Tuesday.

Wall Street reacted favorably to the company's report, sending HomeDepot shares up $2.64, or 9.4%, in late-morning trading.

The jump in Home Depot shares contrasted with chief rival Lowe's ( LOW), whoseshares dropped further on Tuesday after tumbling more than 9% on Monday.Lowe's beat analysts' earnings projections on Monday, but posted slowersales growth than expected.

Home Depot shares are the ones that have been under pressure for much ofthe last year as sales and earnings have slowed, trailing behind Lowe's.Home Depot has acknowledged its problems by embarking on a wide-scaleprogram to renovate its stores and change its merchandise assortment.

The program seems to be working.

In some of the areas where the companyhas modified its assortment, Home Depot has seen sales gains that faroutpaced its anemic same-store sales. Patio furniture sales were up 154% ona comparable-store basis, for instance, Nardelli said. Rug sales were up 15%in the quarter on this basis.

Meanwhile, the average ticket at Home Depot stores reached $58, thehighest in the company's history, officials said.

The company also has seen an jump in its gross profit margin, which isthe difference between what it charges for its goods and what itpays for them. The company increased its gross profit margin 1.44percentage points to 31.97% of sales in the quarter. Home Depot benefitedfrom decreased shrink, or merchandise loss, and lower product costs, companyofficials said.

But the improvements in the company's performance are coming at asubstantial cost, Home Depot's earnings report indicated.

The company's operating expenses increased 12.8% in the quarter to $3.38billion, far outpacing sales growth. As a percentage of sales, such costsincreased 1.39 percentage points to 22.38%.

During the quarter, Home Depot increased the labor hours at its storesand increased its wage rate, Carol Tom¿, the company's chief financialofficer, said on the conference call. Meanwhile, costs for remodeling Home Depotstores exceeded expectations, she said.

"We invested in the customer shopping experience," Tom¿ said. "We viewpayroll as an investment."

Another big increase came in inventory. At the end of the quarter, HomeDepot's inventory was up 24.9%. That was a far larger increase than itposted in either sales or square footage, which increased about 12%year over year.

Home Depot was too light on inventory last year, Tom¿ said. The companymade the decision to invest in inventory to improve its in-stock levels andplans to maintain high inventory levels going forward, officials said.

"You have to have inventory to sell it," Tom¿ said.

More from Stocks

Micron Shares Soar; Chipmaker Is 'Managing for Profitability' Now, Says Analyst

Micron Shares Soar; Chipmaker Is 'Managing for Profitability' Now, Says Analyst

Dow Slips 178 Points; S&P 500 and Nasdaq Also Decline

Dow Slips 178 Points; S&P 500 and Nasdaq Also Decline

Facebook CEO Mark Zuckerberg Deflects Tough Questions From European Parliament

Facebook CEO Mark Zuckerberg Deflects Tough Questions From European Parliament

What Does China's Tariff Deal Mean for Automakers Like Tesla?

What Does China's Tariff Deal Mean for Automakers Like Tesla?

Lowe's Taps Home Depot Veteran As New CEO

Lowe's Taps Home Depot Veteran As New CEO