Current Price: $284 Target Price: $324 (raised from $297)
Position size: 2.3% Performance since inception: +43%
Key Takeaways:
· HD reported very strong Q2 results, beating on revenue and EPS which included elevated costs related to COVID-19.
· Incredibly strong SSS for the quarter (overall SSS +23.4%; US SSS +25%), with similar trends extending into the first couple weeks of August. They are taking share in home improvement with sales that were well ahead of expectations (+8.8%).
· Omni-channel strategy shines. E-Commerce sales were mid-teens % of sales in the quarter, up+100% YoY, with >60% of online sales picked up in store.
· Mgmt. quote from call…”the home has never been more important to the customer”……”despite the significant uncertainty in the current environment, we do believe in the resilience of home improvement demand over the long term. The home typically represents our customers largest asset. The housing stock is aging, and we believe the capabilities we are investing in, across our interconnected platform will position us well to continue capturing market share in any environment.”
Additional Highlights:
· Elevated opex (benefits/wages) used to support employees during the pandemic – was an additional $480m in Q2. This eroded margins in the quarter, but they should see improvement –increased benefits margins were a -125bps impact. Despite this, op margins increased 10bps aided by higher sales volumes and strong expense control.
· Saw healthy growth from both DIY and Pro customers
· E-commerce channel was so strong that they had to temporarily convert a store fulfillment center to be an additional dedicated e-commerce direct fulfilment center.
· Macro commentary:
o Strong housing market heading into the pandemic continues – underpinned by low inventory, rising prices, low interest rates and aging housing stock. In normal, non-housing led recession, they would expect flat SSS.
o Substantiating this, robust residential starts (+22.6%) and build permits (+19%) just reported.
· SSS Details:
o They saw broad strength across merchandise categories, big ticket items, geographies and customer cohorts (DIY & Pro).
o By month, SSS were +27.3% for May, +27.3% for June and +21% in July.
o Both ticket and transaction were up double digits. Ticket was +10% and transaction was +12%.
o Big ticket (over $1000) transactions were +16%. Strength in appliances, riding lawn mowers, patio furniture offset weakness in products that require indoor installation which were impacted by Covid (e.g. kitchen installations).
o 13 of their 14 merchandizing departments posted double digit sss. Strongest was lumber, weakest was Kitchen & Bath which still had high-single-digit sss – that weakness driven by indoor installation headwinds w/ Covid .
o Seeing significant increase in Pro sales as markets re-open from stay at home orders. Notable strength w/the “low spend Pro” – they were less impacted by the pandemic. Higher spend Pro impacted w/ restriction on permitting and inspections – that is continuing to rebound. Multifamily property managers are weakest – rebounding w/ re-opening but delays on major rehabs and capital projects due to social distancing and lack of access to units.
· Capital allocation: suspended share repurchase, dividend maintained.
· Valuation: Strong balance sheet, benefiting from strong housing trends but also has defensive qualities and trading at ~3.8% FCF yield on this year (fiscal 2021).
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]