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Earnings Preview: Home Depot

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The world’s largest home improvement retailer, Home Depot Inc. (HD - Free Report) is set to report its fourth quarter 2012 results on Feb 26. Last quarter it posted a positive surprise of approximately 5.7%. Let’s see how things are shaping up for this announcement.

Growth Factors in the Past Quarter

The company’s improved customer transactions and average ticket size resulted in robust top-line growth in the last-reported quarter. Robust comparable store sales as well as operating performance led to the growth in earnings, which surpassed expectations. Moreover, better cost containment by shuttering unproductive stores helped boost its operating margin.

Further, given the company’s focus on revamping itself by concentrating on square footage growth and maximization of productivity from its existing store base, we believe that Home Depot is well positioned to capitalize on available opportunities.

Earnings Whispers?

Our proven model does not conclusively show that Home Depot is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP (Read: Zacks Earnings ESP: A Better Method) and a Zacks Rank #1, #2 or #3 for this to happen. This is not the case here, owing to the following factors:

Zacks ESP: ESP for Home Depot is 0.00%. This is because the Most Accurate Estimate stands at 64 cents, which is in line with the Zacks Consensus Estimate.

Zacks #2 Rank (Buy): Home Depot’s Zacks Rank #2 (Buy) lowers the predictive power of ESP because the Rank #2, when combined with a 0.00% ESP makes surprise prediction difficult. We caution against stocks with Zacks Ranks #4 and #5 (Sell rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider

Here are some other companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

New York & Company Inc. (NWY - Free Report) with an Earnings ESP of +12.50% and a Zacks Rank #2 (Buy).

Abercrombie & Fitch Company (ANF - Free Report) with an Earnings ESP of +2.59% and a Zacks Rank #1 (Strong Buy).

Dollar Tree Inc. (DLTR - Free Report) has an Earnings ESP of +1.01% and carries a Zacks Rank #3 (Hold).

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