Yeah Sure, Go Scoop Up Some Home Depot

Wondering whether to chase Home Depot's (HD) well-received second quarter and fiscal year guidance, are you? I say go for it (which you probably gathered this morning if you follow me on Twitter @BrianSozzi), and here are a few easy to understand explanations (or the “thesis” for you hardcore jargon lovers) why. Reason #1 In a tough sales comparison quarter (stock sensei: when you see analysts note this it means sales were strong in the prior year and there is a risk that due to the law of large numbers, sales could disappoint this time around. Usually in that prior year quarter there was an outsized influence of some sort, a function of weather for a retailer in most cases), Home Depot's U.S. business comped positively. What this shows is that sales strength broadened out in the recent quarter (better quality), thanks to the one-two punch of improved consumer and professional product demand. There are good reasons to believe these favorable trends are sustained and the market will price them in today (and then you could lighten up on the position as the year moves along). Reason #2 The holiday floorset will be established at the end of the third quarter, and I think more productively done so year over year. What this signals is the economics behind holiday gift-giving items will improve (aka stronger profit margins). Reason #3 Somehow Home Depot has unearthed a strong earnings tailwind in the form of workers compensation expense, which benefited the second quarter's operating earnings by $42 million. Management was quick to temper enthusiasm on that type of benefit continuing in the second half of 2012, but plans are for at least $100 million in savings from this line item to be realized by 2015. In other words, there is further room to surprise consensus operating earnings estimates (and this is a buffer should sales slow into the teeth of fiscal cliff). Reason #4 Through technology investments, Home Depot has found the secret sauce of being able to drive leverage on payroll expenses even while paying employees more in bonuses. Basically, Home Depot is well-staffed at peak demand periods in key areas of the store, and not having people hang around like cigar smoke at off-peak periods. Three words: greater workforce productivity.