The Home Depot, Inc. (NYSE: HD), like its competitor Lowe’s Companies Inc. (NYSE: LOW), managed to beat EPS estimates by a bit, but, unlike its competitor, Home Depot also beat on revenues and raised guidance. Why are the two paths diverging?

Home Depot posted diluted EPS of $0.86 for its second fiscal quarter, beating the consensus estimate of $0.83. Revenues totaled $20.2 billion, also beating the estimate of $19.96 billion. Neither number is particularly brilliant, but Lowe’s couldn’t do as well and we noted a divergence forming between the two just yesterday.

Home Depot also confirmed an earlier forecast that sales would rise by 2.5% in 2011 compared with sales in 2010. The company also raised EPS guidance from $2.24 to $2.34, including the impact of share repurchases. Analysts had been expecting full-year EPS of $2.30. Same-store sales in the period rose 4.3% worldwide and 3.5% in the US.

In February, Home Depot announced that it would close four of its flagship stores, after having closed most of its smaller stores over the previous several years. The company said then that it would open 10 new stores in 2011, of which 7 would be in Mexico.

Lowe’s closed seven stores on August 14th and opened two new stores during the quarter. Home Depot did not report any store openings or closings for the quarter. Home Depot operates 2,245 stores compared with 1,753 for Lowe’s.

Lowe’s also forecast operating margins to fall between -0.1% and -0.2% in the third quarter, including the impact from last week’s store closings. For the year Lowe’s expects same store sales to decline -1% and operating margin to fall by -0.3%, of which -0.25% is attributed to store closings.

By now it’s a truism that homeowners are following home buyers in keeping their wallets closed, and that the amount of money being spent to fix up homes is falling. At Home Depot, the average ticket grew by 3.3% year-over-year to just over $54. In the second quarter of 2006, the average ticket was $58.30 and the number of transactions was identical.

What appears to be happening is that Home Depot has just adjusted better than Lowe’s to the more restrained buying practices of its customers. It got rid of lower performing stores earlier and has been able to compete successfully on price.

In 2006, Home Depot employed 355,000 people compared with 321,000 at the end of 2010. Lowe’s claims 161,000 full-time and 73,000 part-time employees at the end of 2010. In its fiscal year 2006 Form 10-K, Lowe’s claims to have employed 157,000 people full-time and 53,000 part-time.

Home Depot has managed to do more with less. It’s pretty much that simple.

Paul Ausick

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