NEW YORK (Reuters) ? Home Depot Inc (HD.N), the world's largest home improvement chain, raised its fiscal-year profit forecast for the second time in three months on Tuesday as timely promotions and renewed focus on cheaper products helped it gain market share from rival Lowe's Cos Inc (LOW.N).
The news boosted Home Depot's shares by 2.3 percent to $32.20 and hurt Lowe's shares by 1.6 percent to $19.36 in premarket trading.
Home Depot has been quicker to cut costs than Lowe's, and in some cases has benefited as housing markets have improved in regions where it has a heavy presence.
Lowe's reported weaker-than-expected quarterly sales on Monday and cut its fiscal-year outlook for the second time in three months.
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Home Depot said it still expects fiscal-year sales to rise 2.5 percent. It forecast earnings of $2.34 a share excluding future stock repurchases, up from a prior forecast of $2.24.
"They are operating at a high level, taking chances where appropriate in merchandising, leveraging technology investments, and benefiting from a return to more localized marketing and merchandising in the store," said analyst David Strasser of Janney Capital Markets.
In the second quarter, Home Depot's same-store sales, or sales at stores open at least a year, rose 4.3 percent globally, including a 3.5 percent rise in U.S. same-store sales, making it the ninth consecutive quarter that it has outshone its smaller rival. Lowe's same-store sales fell 0.3 percent in the quarter.
"Not only are they benefiting from a continued modest recovery..., they are doing it increasingly at the expense, I believe, of Lowe's," said Thomas Villalta, a portfolio manager at the Jones Villalta Opportunity Fund in Austin, Texas, which owns Home Depot shares.
Home Depot has also benefited from its slower expansion strategy. Under Chief Executive Frank Blake, Home Depot has closed concept stores and upgraded service and products in its core retail business to win back market share from Lowe's.
"They made an effort a couple of years ago. They knew they were suffering on the customer service front. They really made an effort to turn that around... I think it is really paying off," Villalta said.
Others agreed.
Strasser said the 4.3 percent same-store sales rise was better than his 2.5 percent estimate. Promotional programs, including a U.S. Independence Day appliance event and a late July event on storage products, helped win shoppers, he added.
"Home Depot comps are now running well ahead of GDP growth," Credit Suisse analyst Gary Balter said, adding that the chain's back half outlook implies that sales trends will modestly strengthen.
Balter said Home Depot's stock is undervalued and it is set up for significantly stronger earnings when the housing sector stabilizes.
U.S. housing starts fell less than expected in July as builders broke ground on new multifamily units likely to meet demand for rental apartments, while permits for future construction dropped, a government report showed on Tuesday.
U.S. homebuilder sentiment remained stuck near historic lows this month, even as consumer sentiment in the world's largest economy worsened sharply in early August, falling to the lowest level in more than three decades. U.S. economic growth was anemic in the first half of the year.
STRONG QUARTER
Home Depot also beat estimates on quarterly profit as demand picked up for seasonal goods after a soft start to the spring selling season. Storm-related repairs also helped the retailer's sales.
Its second-quarter net income rose to $1.36 billion, or 86 cents a share, from $1.19 billion, or 72 cents a share, a year earlier. Analysts on average were expecting 83 cents a share, according to Thomson Reuters I/B/E/S.
Sales rose 4.2 percent to $20.23 billion, beating analysts' average estimate of $19.96 billion.
In recent months, Home Depot has shifted focus to cheaper products like faucets and paint to increase shopper traffic.
It reported a 1.1 percent rise in the number of customer transactions in the second quarter, while the average ticket rose 3.3 percent to $54.04.
Sales at home improvement chains have suffered as homeowners have stayed away from bigger renovations and expensive items such as appliances in a weak U.S. economy.
(Reporting by Dhanya Skariachan and Lucia Mutikani; editing by John Wallace, Dave Zimmerman)
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