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Home Depot Q3 Earnings Hammer Through Targets

Home Depot (HD) reported better-than-expected third-quarter earnings Tuesday and raised full-year targets as more-confident owners continue to spruce up their homes.

The No. 1 U.S. home improvement retailer's Q3 climbed 28% to 95 cents. Revenue grew 7.4% to $19.47 billion, with same-store sales also up 7.4%. Wall Street expected profit of 90 cents a share on $19.18 billion in revenue.

The big-box retailer lifted its full-year EPS forecast to $3.72 from an upwardly revised $3.60. Wall Street had expected $3.70 before the Q3 results.

Same-store sales are projected to rise 7%. Home Depot previously predicted a 6% comps gain.

Shares rose to an all-time high of 82.27 intraday, but closed up less than 1% at 80.38.

"We view this as a very good quarter marked by a stronger than expected comp of 7.4% (8.2% in the U.S.)," Citi analyst Kate McShane wrote in a client note.

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Q3 transactions rose 4% and the average ticket price 3.2%.

"We have now had 10 consecutive quarters of transaction and ticket growth," Home Depot CEO Frank Blake told analysts on a conference call.

In Q3, Home Depot opened two stores in Mexico, raising its total store count to 2,260.

Online sales, including items purchased for later pickup in stores, climbed 50% year-over-year and are now about 3% of total sales.

A new app geared toward professionals did particularly well. Overall, Home Depot saw slightly faster growth with pros vs. consumer sales.

Gross profit margin also rose modestly to 34.9%, mostly on supply chain efficiencies. Home Depot will open three big fulfillment centers next year to handle online sales.

Blake cautioned that for the current quarter, "we are up against some very tough comparisons," because last year's Q4 results were augmented by storm-related sales.

Tuesday's results follow the summer slowdown in housing demand due to rising mortgage rates from historic lows.

That slowdown was reflected in the lower-than-expected confidence among homebuilders reported Monday. The National Association of Home Builders/Wells Fargo builder sentiment gauge for November was unchanged from a downwardly revised October. Forward-looking gauges like buyer traffic weakened. Still, it was the sixth straight month signaling optimism.

Home Depot Improvement

ISI Group analyst Greg Mellich said Home Depot met and exceeded the brokerage's expectations.

"Home Depot has positioned itself well for the home improvement market," Mellich told IBD. "The big picture for Home Depot is they continue to grow both traffic and ticket, and it will show up on their gross margin bottom over time.

Mellich said home improvement spending in general is still 10% to 15% below normal amid the weak economic recovery, and Home Depot will continue to benefit as spending rises.

No. 2 home improvement retailer Lowe's (LOW) releases quarterly earnings Wednesday morning. Analysts expect a 22% EPS gain to 79 cents with revenue climbing 8% to $15.39 billion.

ISI's Mellich said: "We think their upside is similar to Home Depot's. There's a little more risk but they are benefiting from the same trends.

Lowe's shares initially rose Tuesday, but closed down nearly 1% at 50.44.

Meanwhile, Lowe's paint supplier Valspar (VAL) said Tuesday that Q4 earnings grew 13% to 97 cents a share, the third straight quarter of accelerating growth. That beat estimates for 91 cents.

Revenue rose 8% to $1.11 billion, edging past views for $1.09 billion. That was the fourth quarter in a row of faster sales growth.

Valspar's revenue was boosted by strong consumer product sales and its August acquisition of Inver for an undisclosed price. Italy-based Inver had 2012 sales of about $200 million.

However, Minneapolis-based Valspar sees full-year EPS of $3.95-$4.15, the midpoint a bit below analysts' projections for $4.12. Valspar expects revenue to rise 7%-9% for the year. The midpoint would be just below forecasts for 9% growth.

Valspar also raised its quarterly dividend 13% to 26 cents.

Shares rose 26 cents to 70.93 after an up-and-down day.