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Home Depot's Gain In Q2 Comp Sales Is Best Since 1999

Home Depot (HD) topped second-quarter forecasts and raised its full-year outlook Tuesday, helped by a housing recovery that recently has shown some indications of cooling due to higher mortgage rates.

The nation's biggest home improvement retailer earned $1.24 a share, up 23% from a year ago and 3 cents over views. Revenue rose 9% to $22.5 billion, also beating estimates. Same-store sales climbed 10.7% overall and 11.4% in the U.S.

"We grew sales by almost $2 billion in the quarter, posted the first double-digit positive comp in our business since 1999, and had the highest quarterly transaction count in the company's history," CEO Francis Blake said in a conference call.

The strong results were a positive surprise, Piper Jaffray analyst Peter Keith said: "I think there were high expectations going into the quarter, but the comparable-store sales growth of 10.7% exceeded even the high expectations.

Home Depot raised its 2013 EPS guidance to $3.60 a share from $3.52, but that raise still fell short of analysts' expectations for $3.64. The company's upwardly revised revenue growth forecast was also light.

Home Depot shares, up more than 2% at the open, closed 1% lower.

But Keith thinks Home Depot is being modest with its outlook. While it faces some head winds, he doesn't see that much of a slowdown.

"If you look at Q2, the results across the board were quite strong," he said. "Looking at product categories, regionality ... and at monthly trends, it was strength across the board that gives us confidence this was not a one-time benefit. There is structurally a very strong story here.

Canaccord Genuity analyst Laura Champine said in a report she expects double-digit same-store sales growth to continue for the full year as home values keep rising and the housing market continues to recover.

But risks include the pace of recovery in housing, as well as larger economic trends.

"Significant movements in employment levels or economic growth would likely impact consumer spending," she wrote.

Home Depot warned the latter half of the year will face tougher comparisons due to strong sales resulting from hurricanes Irene, Isaac and Sandy in 2011 and 2012.

Sandy-related sales were about $57 million in Q2, but the boost from that storm should diminish later this year, CFO Carol Tome said.

Though home sales had been boosted by record-low borrowing costs, there are signs the recent spike in mortgage rates have slowed down gains.

Applications for buying a home have fallen 17% since early May. Single-family home starts fell to an eight-month low in July, suggesting homebuilders are growing cautious.

It's unclear if rising rates will affect the home improvement industry eventually, Keith says, but higher rates had no impact on Home Depot in July.

"We personally think that as long as you continue to see modest year-over-year increases in home prices, you'll continue to get a healthy amount of remodel spending from existing homeowners who now feel just more confident about bigger-ticket projects," he said.

Wall Street expects rival Lowe's (LOW) to report a 22% rise in EPS on a 6% increase in revenue when it reports Wednesday.