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Stock Analyst Update

Home Depot Has Foundation to Withstand Recession

Retailer's history makes stock sell-off appear overdone.

Given its history and strong position, Home Depot (HD) appears poised to continue its run as one of the country's premier retail stocks.

The home and building supplier Tuesday announced strong fiscal-fourth-quarter results, capping an overall outstanding year. The chain's earnings per share for the quarter, ended Jan. 30, were $0.25, up 39% from a year earlier and a penny above Wall Street estimates.

These results came from continued strong sales growth (26% for the quarter) combined with improved gross profit margins. Over the last few years, Home Depot has lowered costs by improving its inventory management and by using its clout to get lower prices from its suppliers. As a result, its gross margin in the fourth quarter was 31.9%, up from 30.3% in the year-earlier period and from 28.5% in fiscal 1999.

The big question is whether Home Depot will be able to continue such impressive growth and profitability, especially if the economy slows. Its stock is down 20% so far this year along with those of other major retailers, as fears of interest-rate hikes have weighed on their shares. But Home Depot's stock has held up better than that of such rivals as Lowe's (LOW) and Wal-Mart Stores (WMT), which also also reported good operating results.

And if history is any guide, Home Depot shouldn't be hurt all that much even if the economy does stumble. During the last recession, in the early 1990s, Home Depot's growth and profitability kept going strong. Plus, it has little debt on its balance sheet, having funded its growth internally. So the harmful effect of a recession would be muted for Home Depot.

David Kathman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.