Key Takeaways:
· HD reported strong Q1 results, beating on revenue but missing on EPS due to elevated costs related to COVID-19.
· Strong SSS for the quarter (+6.4%), with “significant acceleration” to double-digit SSS at the end of April into May. This included self-imposed limits on foot traffic, adjusted store hours and halted non-essential install services (“several points of SSS impact in the quarter”).
· Omni-channel strategy shines. E-Commerce sales were 15% of sales in the quarter, up+80% YoY, with >60% of online sales picked up in store. Their e-commerce sales accelerate to triple-digit growth by the end of April.
Additional Highlights:
· Elevated opex (benefits/wages) used to support employees during the pandemic. HD made a series of adjustments to support associates including improving benefits, eliminating co-pays, increasing overtime wages and expanded paid time off for all hourly associates. This eroded margins in the quarter, but they should see improvement – excluding the increased benefits margins would have increased by 120 bps on strong expense control.
· Macro commentary: strong housing market heading into this. In normal, non-housing led recession, they would expect flat SSS.
· Investments in omni-channel & distribution infrastructure were key in enabling them to grow in this environment
o Online: As shelter-in-place orders were rolled out across the country in mid to late March, they saw their digital businesses accelerate from ~30% growth in early March to triple-digit growth by the end of April. Investments in their omni-channel strategy enabled them to support these record e-commerce orders and quickly shift to contactless curbside pickup.
o SSS benefited from different fulfillment capabilities like buy online, pickup in store, and enhanced delivery capabilities, like flatbed truck, box truck and car and van service. Their BOPUS and deliver from store fulfillment options saw a triple-digit growth in the first quarter.
· SSS Details:
o For Q1 SSS were +6.4% vs street 4.3%. US SSS were +7.5%.
o Positive comps of 9.3% in February, 7.1% in March and 4.2% in April. Comps in the US were positive 7.5% for the quarter, with positive comps of 9.7% in February, 7.5% in March and 6.4% in April. Those SSS include a 3 week period, just after shelter-in-place orders – the last week of March and the first two weeks of April – where they saw negative comps in most departments.
o Prior to the outbreak, saw strong sales across the store with all departments showing mid-single to double-digit comps.
o Ticket increased 11% and transactions decreased 4%, reflecting the lower traffic. Saw strong performance in big ticket categories like appliances and riding lawnmowers. This was offset by pressure in categories like special order kitchens, countertops and flooring, where they intentionally limited installation services in customers’ homes.
o Not surprisingly, and related to the above point, DIY sales grew faster than Pro sales.
o For the full quarter, they reported positive comps in 11 of their 14 merchandising departments.
o Comps in kitchen and bath, flooring and millwork, departments with a heavy reliance on in-home installation were negative during the quarter.
· No guidance. “Month-to-month and even week-to-week, we saw extreme ups and downs across different categories and geographies. As a result, we are cautious to extrapolate trends from the first quarter into a forecast for the remaining of the year, particularly given the tremendous amount of uncertainty we face with regards to the duration and continued impacts of the virus.”
· ESG: I think a quote from the CEO on the call really captures one of HD’s advantages: their culture. Associates tend to be long-tenured and experienced which is an advantage in servicing Pro customers. They also often give data points about how many Executives started as store associates. This all hits at the relevance of “S” in ESG. He said, “This reminds me of the words of our Founder, Bernie Marcus, that have never resonated more deeply than they do today. If you take care of our associates, they take care of the customers and everything else takes care of itself.”
· Capital allocation: suspended share repurchase, dividend maintained.
· Valuation: Strong balance sheet, defensive qualities and trading at >4% FCF yield on 2019.
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
$HD.US
[tag HD]
[category earnings]