updated 8/18/2009 11:50:00 AM ET 2009-08-18T15:50:00

Home Depot Inc. on Tuesday that its fiscal second-quarter profit fell 7 percent, as consumers continued to shy away from bigger purchases, but cost cutting and improvements in hard-hit areas of the country like California helped the company beat expectations.

The company said the total number of transactions in the U.S. increased year-over-year for the first time in five years and same-store sales rates improved in Florida and California, two of its most important — and troubled — markets. It lifted its guidance for full-year earnings from continuing operations.

Chairman and CEO Frank Blake said the company took market share from competitors, but he added that same-store sales remained negative in all regions except those experiencing hurricanes last year.

"We remain concerned by the high level of foreclosure activity, which we believe continues to put pressure on the housing markets in those areas, as reflected in lower sales of basic building material products," he said.

He estimated the company might return to positive same-store sales in the second half of 2010.

Home Depot earned $1.12 billion, or 66 cents per share, for the three months ended Aug. 2. That's down from $1.2 billion, or 71 cents per share, a year earlier.

Excluding charges related to Expo, which Home Depot is closing, profit was 67 cents per share, topping analysts' estimate of 59 cents per share, according to a poll by Thomson Reuters.

Quarterly results also included a tax benefit of about $50 million, which boosted earnings by about 3 cents per share. Cost-cutting also helped results as total operating expenses fell 8 percent to $4.56 billion.

Revenue dropped 9 percent to $19.07 billion from $21 billion, falling short of the $19.23 billion analysts expected. Paint, outside garden products building materials, flooring and plumbing performed better-than-average, while millwork, hardware, kitchen, lumber and electrical sold less well. Air conditioner and fan sales were weak due to cooler-than-average temperatures in June and July.

In California, however, weather was good, and the company said that drove garden sales, despite continued high enemployment and foreclosures in the area. Foreclosed homes being put back on the market are also driving sales of things like paint and carpet upgrades.

Customers continued to shy away from bigger-ticket purchases. The number of average tickets of $900 and above fell in the double digits year-over-year.

At Home Depot, the average ticket fell 9.3 percent, to $52.25, but the number of customer transactions actually edged up 0.3 percent, a key figure, said Janney Montgomery Scott analyst David Strasser, because it is the first time since the second quarter in 2004 traffic was positive.

"We have to believe that this is the result of better advertising, a more sophisticated pricing strategy, and general improvements in the service levels at stores," said Strasser.

Overall, sales at stores open at least a year, a key retail metric known as same-store sales, slid 8.5 percent. For U.S. stores, the figure was 6.9 percent.

Credit Suisse analyst Gary Balter, who rates the company "Outperform," noted that for the first time in recent memory Home Depot's U.S. same-store sales were better than rival Lowe's Cos.

Balter said Home Depot's results were driven by "reinvesting in the basics of retailing, customer service, systems, distribution and merchandising, providing an additional lift that Lowe's would not enjoy," he wrote.

On Monday Lowe's reported second-quarter profit fell 19 percent, missing expectations. The weak results helped send the market tumbling on Monday as investors worried about consumers' continuing tight-fistedness.

Home Depot lifted its 2009 earnings from continuing operations forecast to flat to up 7 percent. Adjusted profit is expected to fall by 15 to 20 percent. Its prior guidance was for a 7 percent dip in earnings from continuing operations.

The retailer backed its expectation for revenue to be down about 9 percent.

Analysts predict full-year net income of $1.44 per share on revenue of $65.4 billion.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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