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On Jun 12, 2014, we issued an updated research report on Home Depot Inc. (HD - Analyst Report) after the company posted sturdy results for first-quarter fiscal 2014 despite a slow start to the spring selling season.

Home Depot reported first-quarter adjusted earnings of 96 cents per share, up nearly 15.7% from the year-ago quarter’s earnings of 83 cents, primarily driven by effective cost management and a lower share count. However, adjusted quarterly earnings fell short of the Zacks Consensus Estimate by a couple of cents.

Home Depot’s first-quarter adjusted earnings do not include a benefit of approximately 4 cents per share associated with the partial sale of equity ownership interest in HD Supply Holdings Inc. (HDS - Snapshot Report). On inclusion the same, the company’s earnings stand at $1.00 per share.

Net sales of Home Depot increased 2.9% to $19,687 million from $19,124 million in the year-ago quarter. The company’s overall comparable-store sales (comps) increased 2.6% while comps in the U.S. stores grew 3.3%. The year-over-year improvement in the top line was mainly attributable to a 2.2% rise in the number of customer transactions and an increase of 0.6% in average ticket size. However, net sales missed the Zacks Consensus Estimate of $19,973 million.

Following the strong performance, management reiterated its sales guidance and raised its earnings forecast for fiscal 2014.

Home Depot has always maintained a disciplined capital allocation strategy, focused on making investments to develop its business, while using the excess cash to enhance shareholder returns via dividend payouts and share buybacks.

We expect Home Depot’s focus on developing merchandising tools and increasing investment in e-Commerce to boost its top line and increase market share. Moreover, we believe that the company is on track to achieve its long-term dividend payout target, share repurchase and return on investment targets.

However, we remain slightly cautious about the stock due to impact of soft economic recovery on discretionary spending and intense competition from specialty stores and mass retailers. Apart from this, the company remains exposed to risks of operating in overseas markets, primarily currency fluctuations.

The weakening of foreign currencies against the U.S. dollar may require the company to either raise product prices or contract profit margins in locations outside the U.S. An increase in product price may have an adverse effect on consumer demand.

Currently, Home Depot carries a Zacks Rank #3 (Hold).

Key Picks from the Sector

Some better-ranked stocks worth considering in the Retail industry include Foot Locker Inc. (FL - Snapshot Report) and Zumiez Inc. (ZUMZ - Analyst Report), both carrying a Zacks Rank #2 (Buy).

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