Home Depot Profit Beats Street; to Shrink Expo Unit

Top U.S. home improvement chain Home Depot Inc. (HD) on Tuesday reported a better-than-expected 14 percent rise in first-quarter profit as installation and appliance sales rose, and said it would close nearly a third of its upscale Expo design stores.

Results topped Wall Street estimates and shares of Home Depot were up 4 percent in pre-market trade. Deutsche Bank upgraded the retailer to "buy" from "hold," citing improved gross margin.

Quarterly profit rose to $1.24 billion, or 57 cents a share, from $1.1 billion, or 49 cents a share, a year earlier. The latest quarter included costs of 3 cents a share related to the planned closing of the Expo Design Center (search) stores.

Analysts on average expected a profit of 55 cents, according to Reuters Estimates.

"There's positive sentiment around the home improvement space right now," said Keith Davis, an analyst with Farr Miller Washington, who also noted rising profit and sales at rival Lowe's Cos. (LOW).

"Things aren't slowing down" despite concerns about rising interest rates and store saturation, Davis added.

Home Depot affirmed its previous sales and profit growth targets for the full year.

The world's largest home improvement retailer plans to close 15 Expo stores, which feature showroom-style displays of kitchens and bathrooms and carry higher-priced products, and sell its interest in the underlying real estate. Five other Expo stores will be converted to Home Depot stores, while the remaining 34 profitable Expo stores will continue to operate, the retailer said.

"An interesting concept but not profitable enough to grow," Sanford Bernstein analyst Colin McGranahan said of Expo. In recent years, Home Depot had not opened more Expo stores as it weighed the future of the chain.

"Certain (Expo) stores were not meeting our strategic objectives," Home Depot spokesman David Sandor said. About 100 people work at an Expo store, and employees at closed stores are expected to find work elsewhere within Home Depot, he added.

Total sales in the first quarter increased 8 percent to $19 billion, and sales at stores open at least a year rose 2.1 percent, compared with a year-ago rise of 7.7 percent.

Home Depot, which is spending millions on technology upgrades and store remodels, cited market share gains in appliances and said its services business grew 16 percent, fueled by installation of roofing, kitchens, countertops and carpet. Its average sale rose 5.7 percent to $58.25.

The Atlanta-based retailer, which bought back 36 million shares during the quarter, also cited record gross margin.

The Expo downsizing comes as Home Depot looks to expand its global presence. The retailer has more than 1,900 stores in the United States, Canada and Mexico and is looking to enter China.

Home Depot backed its full-year guidance of sales growth of 9 percent to 12 percent and per-share earnings growth of 10 percent to 14 percent.

Shares of Home Depot rose $1.53 to $38.90, up from a Monday close of $37.37 on the New York Stock Exchange.

On Monday, Lowe's posted a 31 percent rise in first-quarter profit, but missed estimates, saying that cold, rainy March weather slowed sales, which were up 14 percent.