Current Price: $320 Target Price: $340
Position size: >2% Performance since inception: +57% (4/16/20)
Key Takeaways:
- Comparable store sales were 4.5% (a big deceleration from +31% last quarter) as they lap the pandemic home improvement spending surge from last year and as the benefit of stimulus checks wane. E-commerce (mid-teens % of sales) were flat YoY as they lapped 100% growth last year.
- Talk of “peak growth” not concerning – despite slowing SSS, multiple secular tailwinds persist.
- Pro sales growth now outpacing DIY as consumers resume large projects and return to pre-pandemic activities.
- Still not giving guidance
- Quote from the call…”“We are at a point now where the housing stock of the United States is over 20% more valuable than it was two years ago….and so as we look forward, not only have we seen that home price appreciation….but the homeowner balance sheet is incredibly healthy, the state of mortgage-finance is incredibly healthy, and so that’s some of the reasons why we’re optimistic.”
Additional Highlights:
- Talk of “peak growth” not concerning…
- Growth rate slowing doesn’t mean the business is shrinking or that the multiple will contract. While the rate of growth (after this extraordinary year!) will clearly slow, their business will continue to grow over time. Their long-term opportunity is to continue to consolidate a fragmented market in home improvement w/ DIY & Pro, grow their more nascent MRO business (particularly after HD Supply acquisition) and leverage their best of breed omni-channel model.
- Secular tailwinds persist…more homes need to be built. This should be a LT secular driver for HD.
- Undersupply of homes continues to support pricing and years of underbuilding has shifted the age of the existing US housing stock – both of which support home improvement spending.
- According to a recent study by the National Association of Realtors, due to years of underbuilding, the US is short 6.8 million homes.
- Building would need to accelerate to a pace that is well above the current trend…. To more than 2 million housing units per year vs a ~1.6m annual rate for starts.
- From the NAR report released in June…“Following decades of underbuilding and underinvestment, the state of America’s housing stock, which is among the most critical pieces of our national infrastructure, is dire, with a chronic shortage of affordable and available homes to house the nation’s population. The housing stock around the nation has been widely neglected, with a severe lack of new construction and prolonged underinvestment leading to an acute shortage of available housing, an ever-worsening affordability crisis and an existing housing stock that is aging and increasingly in need of repair.”
- Higher inflation –they can pass through pricing, inflation is a tailwind to SSS which drives some operating leverage
- Best of breed omni-channel model drives productivity
- By adding specialized warehouse capacity and enhancing digital capabilities (online and in the store), HD is uniquely positioned to leverage their existing retail footprint (not really growing stores) and drive steadily high ROIC that is ~45% (which is incredible).
- They dominate the category, are the low cost provider, have a relentless focus on productivity and can continue to flow an increasing amount of goods through their big box stores w/ omni-channel. This is a highly efficient model as 55% of online sales are picked up in-store which HD can fulfill from the store or nearby warehouses.
- Their express car and van delivery service covers over 70% of the U.S. population w/ coverage continuing to improve.
· Capital allocation: they’ve resumed share repurchases and remain committed to growing their dividend over time
· Valuation: Strong balance sheet, benefiting from strong housing trends but also has defensive qualities and a reasonable valuation, trading at ~4.6% 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]