Current Price: $267 Target Price: $324
Position size: 2% Performance since inception: +36%
Key Takeaways:
· HD reported strong Q4 results, beating estimates. Stock was down on guidance. No formal guidance for 2021 given uncertain environment. If demand level stays where it is currently at, they would see flat to slightly positive SSS. They lap difficult compares from last year. Improvement w/ Pros should help offset weakness from DIY as trends shift w/ a decrease in social distancing.
· Incredibly strong SSS continues for now (overall SSS +24.5%; US SSS +25%). They continue to take share in home improvement with sales that were well ahead of expectations.
· Omni-channel strategy continues to shine. E-Commerce sales were mid-teens % of sales in the quarter, up+83% YoY, with 55% of online sales picked up in store.
· Announced 10% dividend increase
· Mgmt. quote from call…” At the beginning of the year, I would have never thought it possible for the business to grow over $21 billion in 2020. For context, it took us 19 years as a company to achieve the first $20 billion in total sales and we outgrew that in this year alone.”
Additional Highlights:
· While HD will be lapping difficult comparisons this coming year, multiple tailwinds still persist. Nesting effects from Covid have been a tailwind – continued WFH/hybrid work environments should continue to support “nesting” to a degree despite a vaccine. Additionally, strong housing fundamentals should continue to be supportive to sales – including higher household formation w/ suburban migration and an aging housing stock. Also, record low inventory and low interest rates support pricing which supports investment in the home. Finally, they should see tailwinds w/ pent-up demand from Pros as social distancing caused a delay in inside projects.
· Omni-channel model continues to shine – E-commerce sales were +80%. Omni-channel strategy differentiates them from peers helping to drive share gains. Express car and van delivery service that covers over 70% of the U.S. population.
· Margin expansion potential – elevated opex due to Covid will abate, but an offsetting factor is that GM will see a hit from higher transportation costs. During fiscal 2020, they invested ~$2 billion on enhanced compensation and benefits for associates – they made about half of those increases permanent. In Q4 enhanced compensation caused 105bps deleverage while gross margins were 30bps lower on pressure from higher mix of lumber, shrink and transportation costs.
· SSS Details:
o Broad-based strength across the store and all geographies. All of top 40 markets posted double-digit comps, while Canada posted comps above the company average, and Mexico posted double-digit comps in local currency.
o SSS above 20% in the US for 36 of the last 39 weeks
o All merchandising categories saw double-digit growth. Lumber & indoor garden were the strongest.
o Saw strong double-digit growth from both the Pro and DIY customers. Large pro customers seeing an increase in backlog.
o Both ticket and transaction were up double digits. Inflation from core commodity categories positively impacted average ticket growth by 220bps.
o Big ticket (over $1000) transactions were +23%..similar to last quarter. Strength in appliances, vinyl plank flooring and vanities.
· Capital allocation: resuming share repurchases this quarter and dividend increased by 10%. Remain committed to growing over time.
· Valuation: Strong balance sheet, benefiting from strong housing trends but also has defensive qualities and reasonable valuation, trading at ~4.9% forward FCF yield.
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]