Current Price: $393 Target Price: $410
Position size: 2.3% Performance since inception: +45%
Key Takeaways:
- Better than expected results as comparable store sales were +6.1% as elevated home improvement demand persists. They had positive comps every week despite unprecedented compares from 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: “we do not believe we can accurately predict how the external environment and cost pressures will evolve and how they will ultimately impact consumer spending.”
Additional Highlights:
- Quotes…
- On duration of supply chain constraints: “I would say this goes well into, if not through 2022 and we’ll keep doing what we’re doing with the innovation we’ve talked about and leveraging our scale as well as our new assets. I mean, when you think of our inventory growth, part of that is stocking these new facilities. So, not only have we improved our in-store stocking levels and been able to meet the accelerating demand through the quarter, but we’re also stocking all those new facilities that I talked about. So, we’re clearly getting disproportionate flow and that’s where our merchants and supply chain teams will continue to push.” This speaks to their scale and supply chain advantage in getting product on their shelves.
- Demand trends: “we continue to see customers taking on larger home improvement projects as evidenced by the continued strength with our Pro customer which once again outpace the DIY customer”…”customers continue to tell us that they have projects on their list; Pros tell us that their backlogs are significant.”
- Housing market: “when you look at the constrained availability of new housing, that clearly is having a positive impact on home values. And when customers home values are in a positive side of the ledger, they feel good about investing in their homes. I think that is, for sure, an element that is helping the overall home improvement dynamic. That housing availability shortage isn’t going to get solved anytime soon at the rate that we’re building homes, even though it’s an accelerated rate from where it’s been. That backlog is going to be there for quite some time.”
- Consumer spending trends: “as the year started everybody believed during 2021 that we would see a significant shift away from goods back to services as the economic environment opened up, as we got our arms around the pandemic. Clearly, we have not seen that. I’d say that from the standpoint that yes you’ve seen things like travel and restaurants open up, but the customers continue to spend in the home improvement space. And, to date, we have not seen that dramatic shift back that everybody predicted”…”we think that the underlying factors for the home improvement industry are strong.”
- Solid current trends:
- Sales were $37B or +9.8% YoY on 6.1% SSS.
- SSS of 3.1% in August, 4.5% in September and 9.9% in October. Q4 SSS are running ahead of total Q3 SSS.
- E-commerce (mid-teens % of sales) grew 8% YoY as they lapped almost 90% growth last year.
- 55% of online orders being fulfilled through stores, supportive of their omnichannel advantage
- Big-ticket comp transactions or those over $1,000 were up approximately 18%, indicative of strong consumer environment
- Managing well in difficult retail environment – While the retail industry is broadly seeing industry-wide supply chain disruptions, inflation and a tight labor market., they’ve not had issues hiring associates, in-stock levels are solid and they can pass through pricing – and inflation is a tailwind to SSS which drives some operating leverage.
- 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.”
- 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 massive demand increase during Covid) will clearly slow, their business will continue to grow over time. Their long-term drivers are the durable housing trends, taking share in a fragmented home improvement market w/ DIY & Pro, grow their more nascent MRO business (particularly after HD Supply acquisition) and leverage their best of breed omni-channel model.
- 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.
- One Supply Chain rollout continues – investments support HD as the fastest, most efficient, low-cost provider. They continue to add new bulk distribution centers (used replenish stores with lumber and building materials), flatbed distribution centers (which are often tied to the bulk distribution centers), MDOs (market delivery operations are used to flow through big and bulky products, particularly appliances) and are now at 7 direct fulfillment centers for e-comm fulfilment – they’ll ultimately have ~20 direct fulfillment centers which will allow them to cover 90% of the country in same or next-day delivery.
· 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 just <4% 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]