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Home Depot results buoyed by contractors, 1st-time homebuyers

Home Depot Inc. executives pinned the retailer's strong earnings results on a "real emergence of first-time homebuyers" and gains in the company's "Pro" contractor customer category as the housing market continues to recover.

Demographics are in Home Depot's favor, said Carol Tomé, Home Depot's CFO, in a conference call Aug. 15 following the release of fiscal second-quarter earnings. Millennials are finally purchasing homes, upping the number of first-time home buyers, she said. At 34%, the largest share of home buyers are millennials, according to data released in March by the National Associations of Realtors in their annual home buyers trend report. Of those millennials, 66% were first-time buyers.

"First-time homebuyers tend to buy homes that need repair and remodel," Tomé said during the conference call. Home Depot has been anticipating the time when millennials would reach an age to start a family and enter the ranks of first-time homebuyers, a trend that is finally happening and paying off for the company, she said.

For homes built before 1980, the average annual home-improvement spend is $3,500, and for those built after 2000, homeowners spend an average of $1,500 a year on improvements, Tomé said. Home Depot cited data from a real estate consulting firm that estimates that on average, for every percentage point improvement in real wages, there is a 1% increase in the money spent on home repair and remodeling. Real wages are up 2.2% this year after inflation, according to Home Depot executives.

"It stands to reason, if you've got more money in your pocket, you're going to spend some more money on your home," Tomé said.

Sales in Home Depot's Pro, or contractor, sector outpaced those by DIY customers, said Craig Menear, Home Depot's Chairman, President and CEO during the conference call. Home Depot has acquired a number of equipment rental and maintenance services that cater to contractors, including the deal to acquire Compact Power Equipment which closed in the second quarter.

"Our Pro customer spends dramatically more than the average DIY customer," he said. "We believe that the work that we're doing to enhance the service capabilities for the unique needs of Pro customers continues to resonate."

Pro-heavy categories — including appliances, electric and flooring — drove big-ticket sales, which the company defines as transactions over $900, up 12.4% compared to the same quarter a year ago, Home Depot said.

In June, privately owned housing starts increased 8.3% to 1.22 million, the highest level since February, according to data from the U.S. Census Bureau.

Home Depot's revenue for the fiscal second quarter reached $28.11 billion, up 6.2% from $26.47 billion in the same period a year ago, the company reported Aug. 15. The home improvement retailer also increased its full-year guidance to $7.29 diluted earnings per share, compared to its previous EPS guidance of $7.15. S&P Capital IQ's consensus estimate EPS for the full year is $7.29.