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World’s largest home specialty retailer, The Home Depot Inc. (HD - Analyst Report) is scheduled to report its financial results for the third quarter of fiscal 2012, before the opening bell on Tuesday, November 14. The current Zacks Consensus Estimate for earnings for the second quarter is 70 cents a share, which is much higher than 60 cents delivered in the prior-year quarter. Revenue, as per the Zacks Consensus Estimate, is pegged at $17.910 billion.

With respect to earnings surprises, Home Depot has topped and matched the estimates over the trailing four quarters in the range of flat to 19.1%. The average surprise over the last four quarters remained at 8.3%.

Second-Quarter Synopsis

Home Depot’s adjusted earnings of $1.01 a share for the second quarter of fiscal 2012, climbed 17.4% from 86 cents earned in the year-ago quarter, beating the Zacks Consensus Estimate of 97 cents. The robust bottom-line performance was primarily driven by comparable-sales growth and strong operating performance.

During the reported quarter, net sales moved up 1.7% to $20.570 billion compared with $20.232 billion in the prior-year quarter. This increase was a result of an improvement of 2.1% in overall comparable store sales. Comparable store sales in the U.S. stores grew 2.6% during the second quarter. However, net sales for the quarter fell short of the Zacks Consensus Estimate of $20.730 billion.

Fiscal 2012 Outlook

Following solid first-quarter results, management raised its fiscal 2012 earnings guidance to $2.95 per share, an increase of 19% from the previous fiscal’s earnings of $2.47 and up from $2.90 forecasted earlier. The company reiterated its net sales growth guidance of 4.6%.

Earnings Estimate Revisions

Agreement

We have seen significant estimate revisions at this point for the third quarter of fiscal 2012. Of the 20 estimates, 6 were revised upward, while none moved in the opposite direction in the last 30 days. In the last 7 days, 6 estimates have been upgraded, while no movement was noticed in negative direction for the quarter.

For fiscal 2012, of the 16 estimates, 4 were revised in the positive direction, while no movement was seen in the opposite direction, in the last 30 days. In the last 7 days, 4 estimates were revised in the upward direction, while none were revised in the opposite direction.

We believe that the company’s history of earnings surprises along with sales boost ahead of superstorm Sandy motivated analysts to move their estimates upward for the third quarter and fiscal 2012.

Magnitude

The magnitude of estimate revisions for Home Depot depicts a neutral outlook for the upcoming second quarter. Over the last 7 and 30 days, earnings estimates for the upcoming quarter remained unchanged at 70 cents per share. For fiscal 2012, estimates went up by a penny to $2.97, in the last 7 and 30 days per share.

Our Recommendation

Home Depot is the leading player in the highly fragmented home-improvement industry. The company has reinvigorated itself with a shift in focus from new square footage growth to maximization of productivity through its existing store base. In addition, the company has implemented significant changes to its store operations to make these simpler and customer-friendly, thereby inducing more customer traffic. We expect these initiatives to boost its top line.

Moreover, with the introduction of a new warehousing and transportation system, the company has been able to improve its supply chain while minimizing cost. This has also helped Home Depot improve its Central Automated Replenishment System to facilitate immediate refilling of stock while reducing investments in inventory.

Home Depot will remain focused on optimum capital allocation, which will further enable it to increase shareholders’ wealth. However, given the current economic environment, we believe that spending on big remodeling projects will likely remain under pressure in the near term. This influenced us to keep our long-term recommendation on the stock at ‘Neutral’. Home Depot currently maintains a Zacks #2 Rank, which translates into a short-term Buy rating. Peer Lowe's Companies Inc. (LOW - Analyst Report) also holds a Zacks #2 Rank (short-term Buy rating).

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