--Charge linked to China store closures crimps profit
--Core profit and sales stronger than expected
--Shares up 2% premarket
(Updates with further details throughout.)
By Joan E Solsman and Saabira Chaudhuri
Home Depot Inc.'s (HD) fiscal third-quarter net edged up 1.4% as the home-improvement chain paid for its decision to retrench in China but benefited from surprisingly robust core profit and sales.
Shares were up 2% at $62.40 in premarket trading, as results topped Wall Street expectations and the company lifted its 2012 earnings view again.
Chief Executive Frank Blake said the third-quarter performance was stronger than Home Depot itself expected as well, reflecting "in part, what we believe is the start of the path toward the healing of the housing market."
Housing recovery is key to the growth of Home Depot and its smaller rival Lowe's Cos. (LOW), which reports Monday. Recently, home construction has surged and home prices have risen, mounting signs that a real-estate recovery in the U.S. is gaining momentum. Home Depot shares have ascended as that rebound appears to take hold, up 46% so far this year.
However, other companies active in the sector like Fortune Brands Home & Security Inc. (FBHS) have noted that while new construction has been strong, rebuilding and remodeling--more relevant to Home Depot sales--have been clumpy and modest.
Nevertheless, same-store sales at Home Depot rose 4.2% in the latest period, including a 4.3% increase in the U.S., whereas analysts were expecting a gain of around 3% even with the sale benefit of disaster-preparation sales from Hurricane Sandy. Average ticket was $54.55, a 2.9% rise from $53.03 a year earlier, while the number of customer transactions edged up 1.7%.
Profitability growth cooled somewhat. Operating margin improved to 9.6% from 9.3%, its most modest increase in at least the last two years. Gross margin widened slightly to 34.6% from 34.4%.
Last month, Home Depot joined a growing list of companies revamping their strategy in China, as it planned to close the seven big box stores it operated there and explore other formats like a home decorations outlet. Home Depot's warehouse model struggled to find a foothold in China, where cheap labor and apartment-based living crimp do-it-yourself demand. The big-box closures resulted in a previously announced charge in the latest period, which came out to 11 cents a share.
Overall, Home Depot reported a profit of $947 million, or 63 cents a share, compared with a year-ago profit of $934 million, or 60 cents a share. Stripping out the China charge, profit was 74 cents a share. Sales rose 4.6% to $18.13 billion.
Analysts polled by Thomson Reuters most recently forecast earnings of 70 cents on revenue of $17.92 billion.
Home Depot raised its view for the year to adjusted earnings of $3.03 a share on revenue growth of about 5.2% from its prior view of $2.95 a share on growth of 4.6%.
Write to Joan E. Solsman at firstname.lastname@example.org and Saabira Chaudhuri at email@example.com
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