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Home Depot raises forecasts after strong start to the year

By Sruthi Ramakrishnan

(Reuters) - Home Depot Inc (HD.N) boosted its sales and profit forecasts for the year on Tuesday after a stronger-than-expected first quarter, driven by a healthy housing market and favorable weather that encouraged Americans to spruce up their homes.

The company's results stood in stark contrast to grim quarterly reports from retailers such as Macy's Inc (M.N), which have been hit as consumers shift spending away from apparel and accessories to big-ticket items including cars and homes.

"After last week's dismal set of retail trading updates, Home Depot provides some much needed relief and also an indication of where consumers are spending their money," Håkon Helgesen, an analyst at research firm Conlumino, said in a note.

However, shares of the No. 1 home improvement chain were down 1.9 percent at $132.72 in a weaker market at midday as some investors concluded that the stock had run its course for now.

"With shares trading at a premium to historical averages and expectations for slower profit margin improvement going forward as the company is at peak profit margins, we believe shares fully reflect the company's high growth expectations," Edward Jones analyst Robin Diedrich wrote in a note.

Up to Monday's close, Home Depot's shares had risen 19.4 percent in the past year, outperforming the S&P 500 consumer discretionary index's (.SPLRCD) rise of 2.7 percent.

Home Depot said its strong start to the year was characterized by weather-related demand spikes that added $250 million to sales in the quarter.

Sales of products priced at more than $900 rose 9.5 percent in the quarter ended May 1, with strong sales of appliances, roofing, sheds and windows, the company said.

Home Depot's sales U.S. stores open for more than a year rose 7.4 percent, well above the 4.9 percent average forecast of analysts surveyed by research firm Consensus Metrix.

"We believe that February was the strongest month, driven by a 'warm winter' and unseasonal weather last year in many areas," J.P. Morgan analyst Christopher Horvers wrote in a client note.

"March was solid and then April slowed with normal spring weather volatility affecting sales."

Warm weather during February gave the company a great start to the year as outdoor projects took off strongly in the North, Chief Executive Craig Menear said on a call with analysts, adding that spring weather had yet to arrive in many markets.


Strength in the U.S. housing market is likely to continue, the company said.

"While U.S. GDP forecasts have pulled back slightly since we built our 2016 sales plan, we continue to see strength in the housing market, with home price appreciation (and) housing turnover and household formation trending where we thought they would," Chief Financial Officer Carol Tomé said on the call.

U.S. housing starts rose a stronger-than-expected 6.6 percent in April, data showed on Tuesday.

Housing starts hit their highest level in five months in February, before falling more than expected in March.

Home Depot's net income rose 14 percent to $1.80 billion, or $1.44 per share, in the quarter while net sales increased 9 percent to $22.76 billion.

Analysts on average had expected earnings of $1.36 per share and revenue of $22.39 billion, according to Thomson Reuters I/B/E/S.

The company said it now expected full-year earnings of about $6.27 per share, with overall sales growing about 6.3 percent and comparable sales increasing by about 4.9 percent.

Shares of Home Depot rival Lowe's Cos Inc (LOW.N), which will report on Wednesday, were down 1 percent at midday.

(Reporting by Sruthi Ramakrishnan; Additional reporting by Siddharth Cavale; Editing by Ted Kerr)