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November 13, 2018

Home Depot posts strong sales despite real estate trends

So much for the housing slowdown hurting Home Depot.

The home improvement retailer reported third-quarter earnings Tuesday that easily topped forecasts. It also boasted strong sales and lifted its outlook for the year.

Home Depot seems to be benefiting from a nesting phenomenon -- Americans are willing to spend on home improvements even if they are not looking to sell.

CEO Craig Menear said in a press release that both professional builders and do-it-yourself customers were spending more.

Sales at Home Depot (HD) grew more than 5% in the quarter despite new and existing home sales falling in September in the wake of higher mortgage rates.

The growth "is a testament to the overall strength of demand in the home improvement market," Menear said.

To that end, executive vice president of merchandising Ted Decker said during a call with analysts that sales of big ticket items that cost more than $1,000, such as vinyl flooring, appliances, and windows, were up more than 9% in the quarter. Big ticket purchases account for about 20% of overall Home Depot sales.

Consumers are still spending to improve their homes even if they are not looking to sell.

One analyst called it a particularly encouraging sign for the economy. Even if people may not be looking to buy new homes, they are still confident enough to spend more to fix up their existing house.

"Consumers are not in scrimping mode like they were in 2008," said Bob Phibbs, CEO of New York-based consultancy the Retail Doctor. "They are treating themselves to higher quality products, especially if they think they are going to be in that home for awhile."

The threat of more US tariffs on foreign-made washing machines and other appliances may not have that much of an impact on Home Depot either.

Menear said during the conference call that current tariffs affect about 1% of total US purchases at Home Depot. Even if a 25% tariff winds up going into effect early next year, Menear said that would hit just 3.5% of purchases.

Decker added that any impact from higher tariffs were "more than manageable," noting that Home Depot has already dealt with higher costs because of steel tariffs.

Home Depot also appears to be taking advantage of continued turmoil at its top rivals. Lowe's (LOW), which will report its latest results next week, recently announced it would close 47 stores.

Lowe's is trying to get back on track with new CEO Marvin Ellison, formerly the head of JCPenney (JCP). Lowe's sales are only expected to increase by about 3.5% in the third quarter.

JCPenney, which is trying to make a bigger push into the appliance market, continues to struggle, too. And the bankruptcy of Sears (SHLDQ), another major seller of appliances, could be helping Home Depot as well.

Take that Amazon? Home Depot posting impressive digital growth

On the digital front, it looks like Home Depot is more than holding its own against Amazon (AMZN), Walmart (WMT) and Best Buy (BBY).

Menear said digital revenues were up about 28% from a year ago.

But all this good news wasn't enough to lift Home Depot's stock. Shares of Home Depot were lower in late morning trading as investors remained nervous about rising interest rates eventually hurting retailers.

Menear brushed aside those worries though.

"Even in the downturn of 2008, which was obviously the most difficult since the [Great] Depression, customers were willing to spend for new innovative products," he told analysts.

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