Month: May 2022

TJX Q1 Results

Current Price:   $56                        Price Target: $83

Position Size:    3.7%                      TTM Performance: -6%

 

Key takeaways:

  • Stock is trading down today after ROST gave a weak outlook. No news on TJX. While ROST is also an off-price retailer, they have different merchandising strategies, a different core customer (higher income at TJX) and ROST has less than half the scale of TJX. Quote from ROST call: “escalating inflationary pressures had a larger impact on lower-income households.” ROST had -7% SSS, while TJX SSS were flat.
  • Managing current/inflationary environment better than peers; their margins are going up while others are going down – slight miss on top line but beat on earnings given better than expected margins and gave higher full year EPS and margin targets. Their strong mark-on aided by their nimble merchandising strategies, recent pricing initiatives and expense management are helping offset higher freight.
  • TJX’s agile business model gives them a big advantage as consumers are shifting what they are buying…
    • TJX can adapt and be opportunistic…they are constantly in the market buying and flowing in-season goods to stores w/ shorter lead times than traditional retailers and they have the ability to pivot merchandising based on current trends. Other retailers don’t have the same agility, which is leading to excess inventory that TJX can opportunistically buy.
    • For instance, TGT got hurt by having inventory in the wrong categories. On their call they simultaneously talked of excess inventory and also out of stocks and having to find temporary places to store bulk inventory…i.e. too much furniture and TVs and not enough luggage and on-trend apparel. They’re also seeing shift to lower margin essential items where they may limit passing through price increases. In the current environment, with tight shipping capacity, there is a stiff penalty to shipping stuff you can’t sell right away, storing (cost and extra labor) and expediting shipping on other stuff leaving them more exposed to things like spot trucking prices where diesel costs are surging (while gas prices have come down recently diesel prices have continued to go up).
  • Excess inventory at other retailers is an opportunity for them – inventory is up across retailers as shortages, shipping delays and changes in what consumers are buying (reflective of a shift to spending on services over goods…i.e. buying luggage for travel, clothing for events).
  • In a recessionary environment, off-price value proposition increases as consumers’ wallets tighten and higher quality inventory becomes more available.
  • Higher labor costs should be stickier than freight. When freight pressures abate, this will be a tailwind to margins –While higher wages will stay, freight pressures are expected to improve, which should be a tailwind to margins, particularly for the companies that were able to raise prices to offset.
  • Valuation: strong balance sheet, 2% dividend yield as they just raised the dividend 13%; in fiscal ’23 they plan to buyback $2.25B to $2.5B of stock (or about ~3.5% of the market cap), and the valuation is reasonable at ~5% forward FCF yield, cheaper than the S&P. They are growing the top line mid-single digits and w/ margin expansion and buybacks, they’re compounding FCF/share double digits.
  • Quotes from the call..
    • “in today’s highly inflationary environment, we believe our value proposition is as appealing as ever.”
    • “We still have plenty of open-to-buy for the second quarter and second half of the year. We remain well positioned to take advantage of excellent deals we are seeing in the marketplace and flow fresh merchandise to our stores and online throughout the year.”
    • “we continue to see significant store growth opportunities ahead for all of our divisions. As we have seen over the last few years, demand for our exciting and inspiring in person shopping experience remains strong. We see our flexible buying supply chain and store formats as tremendous advantages, which allow us to open stores across a wide customer demographic. All of this gives us confidence in our long-term plan of opening more than 1,500 additional stores in our current markets with our current banners.”
    • “we are planning to grow our sales and open new stores, while many other retailers are closing stores, we offer vendors a very attractive solution to clear their excess product.”
  • Long-term thesis intact – Relative to other brick-and-mortar focused retailers, TJX  continues to have a superior and very differentiated model. They acquire their inventory from an enormous (and growing) network of vendors, acting like a clearing mechanism for the retail industry…essentially opportunistically buying leftover/extra product that constantly flows from retailers, branded apparel companies etc. Growth of e-commerce has led to better inventory opportunities/ selection, not worse. They leverage their massive store footprint and centralized buying to merchandise their stores and e-commerce sites w/ current on-trend product. No one else does this at the scale they do. Their immense buying, planning and allocation, logistics teams are helping them navigate the current environment. They have very quick inventory turns and can be nimble and re-active w/ their inventory buys and are an important partner to their sources of inventory…and becoming even more important. It’s a powerful model that continues to take share and, while they have a growing e-commerce business too, their store model has been very resistant to e-commerce encroachment. Moreover, they have a thriving Home business, a growing e-commerce presence, an expanding international store footprint and a track record of steadily positive SSS. Prior to 2020, in their 44 year history they only had 1 year of negative SSS (this is unheard of!). So, with steadily positive SSS, a slowly growing store footprint and an emerging e-commerce business, TJX steadily grows their topline w/ consistent margins that are about double that of department stores.

 

 

 

 

Sarah Kanwal

Equity Analyst, Director

 

Direct: 617.226.0022

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

 

$TJX.US

[tag TJX]

[category earnings]

 

Home Depot Q1 Earnings

Current Price: $298                  Target Price: $410

Position size: 3%                       TTM Performance: -3%

 

Key Takeaways:

  • Better than expected results and raised guidance  – SSS were +2.2% w/ inflation as a tailwind. Sales guidance was raised from “slightly positive” to +3%. Record quarter despite a slower start to the spring in many areas of the country (had negative double digit SSS in seasonal categories) and lapping tough compares from last year given more favorable weather, stimulus and a surge in home improvement sales w/ the pandemic.
  • Long-term growth drivers for home improvement sector remain intact – while rising rates may be a headwind to affordability and turnover (new & existing home sales), strong supply demand dynamics supports prices (millennial household formation, years of underbuilding and low inventory for sale). And, importantly, home prices are more correlated w/ home improvement spending than turnover. That combined w/ an aging housing stock all drive repair & remodel activity.
  • Pro sales growth outpacing DIY – Pro is now ~50% of total, increasing as a part of the mix as consumers resume large projects and return to pre-pandemic activities. 
  • Well positioned in the current inflationary environment – inflation is a tailwind to SSS (inflation in things like lumber and copper added 240bps in Q1). If inflation recedes, lower freight will be a tailwind to margins and lower inflation fears should reduce the impact of rising rates on housing turnover (aiding demand).
  • Valuation: cheaper than the S&P with high moat, strong balance sheet, very high ROIC, benefiting from strong housing trends but also has defensive qualities and a reasonable valuation, trading at >5% forward FCF yield and increasing dividends and buybacks.

 

Additional Info…

  • Housing is a bigger driver of consumer wealth for the average household than the stock market…
    • In aggregate, housing is 25 % of consumer balance sheets…but housing is a far higher % for the average family b/c equities are concentrated among the wealthy.
    • The top 5% of US households own 71% of US equities, while the top 20% of US households own 93% of US equities (source: Survey of Consumer Finances, Federal Reserve Board).
  • Quotes on demand and the health of the consumer:
    • “we continue to see outsized demand for Home improvement projects”
    • “our customers continue to trade up for premium innovative products”
    • “Big ticket comp transactions or those over $1,000 were up 12.4% compared to the first quarter of last year.”
    • “We’re encouraged by the momentum we’re seeing with our pros and they tell that their backlog are strong.”
    • “Over our history, we’ve seen that home price appreciation is the primary driver of home improvement demand. When you’re home appreciates in value, you view it as a smart investment and you spend more on it.”
    • “So let’s talk about interest rates, I think it’s important to remember that our addressable market is the 130 million housing units occupied in the US. Plus 40 million to 50 million more in Canada and Mexico. Of those 130 million housing units, on any given year, only about 4% or 5% are sold. That means that over 95% of our customers are staying in place. They’re not shopping for a mortgage. Nearly 40% of those homes are owned outright. Of those who have mortgages, about 90% of those mortgages are fixed rate. So, when you think about our addressable market, the vast majority aren’t really paying attention to mortgage rates. And what’s interesting about that is what we heard when they do look at moving. They’re actually more and more tempted to stay in their low fixed-rate mortgage and remodel their home instead. So these low, locked in, mortgages are probably a benefit on home improvement.”
  • 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 ~1.8m annual rate for starts to close the gap in 10 years.
    • From the NAR report released last 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.”
  • They recently updated their total addressable market (TAM) estimates…
    • They updated their N. American TAM estimate from $650B to $900B with Pro and DIY each representing 50% and with MRO accounting for $100B of Pro. They also provided a long-term sales target of $200B. At a mid-single-digit CAGR, they would hit this in 2029. HD has about 17% share and LOW has ~11%… the other ~72% is pretty fragmented providing lots of opportunity to take share which is supportive of their LT growth targets.

·         Multiple long-term growth drivers: durable housing trends, taking share in a fragmented home improvement market w/ DIY & Pro, and growing their more nascent MRO business (particularly after HD Supply acquisition) and leveraging their best of breed omni-channel model.

·         Best of breed omni-channel model drives productivity: 

o   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 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 adding direct fulfillment centers for e-comm fulfilment which will allow them to cover 90% of the country in same or next-day delivery.

o   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 >50% of online sales are picked up in-store which HD can fulfill from the store or nearby warehouses.

 

 

 

 

  

Sarah Kanwal

Equity Analyst, Director

 

Direct: 617.226.0022

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

 

$HD.US

[tag HD]

[category earnings]

 

 

BKNG 1Q Results

Current Price: $2,185      Target price: $2850

Position Size: 1.8%          TTM Performance: -4%

 

 

Key Takeaways:

  • Beneficiary of strong rebound in pent-up demand for travel as consumers shift spending from goods to services – Booking is primarily exposed to leisure travel which is recovering faster than business travel, aided by higher rates. Similar to Hilton, they benefit from inflationary pressures on room rates as they earn a % of room revenue.
  • Room nights for the quarter were only 9% below 2019 baseline. This is a big improvement from last quarter that was still 21% below 2019. The impact from Russia/Ukraine was not quantified, but despite this, trends improved.
  • Higher room rates + continued room night recovery = record bookings in April – Total dollar value of gross bookings was the highest ever for the month of April while room nights exceed the 2019 level for the first time since the onset of Covid.
  • Seeing strong demand for summer holiday reservations – gross bookings for summer are now more than 15% higher than they were at this time in 2019, and within Western Europe and North America, both up over 30% vs 2019. “If the current trends continue, we could see a record summer travel season, and we’re gearing up to prepare for that across all parts of our business.”

·       Connected trip, payments & alternative accommodations are long-term growth drivers – The long-term vision for them continues to be the “connected trip.” The idea is to be a platform for not just hotel, but a portal for all aspects of travel including flights, activities, restaurants (i.e. OpenTable) etc. A key part of this is building up the “supply” (e.g. tour operators). They continue to invest behind this including their payment platform (1/3 of bookings) which enables alternative forms of payment like WeChat, it enables payment to companies like tour operators through their platform, and offers buy-now-pay-later offered via partnerships with 3rd parties. This is a multi-year endeavor to transition from their accommodation only focus in the past.  As these grow over time, it will drive a mix shift that will add revenue and grow profit dollars, but at a lower margin than traditional accommodations. An offsetting factor to this should be increased direct book (especially via their app), lower customer acquisition costs and lower performance marketing (i.e. lower dependence on search engines). This dynamic is key to margin growth over time as they spend close to 1/3 of revenue on marketing. Alternative accommodations are 30% of the mix and are skewed towards Europe, but they are focused on growing their US business particularly w/ building inventory w/ multi-property managers.

·       Stock is not expensive, expectations are reasonable and supported by buybacks – Trading at ~5.5% FCF yield on 2022. Consensus is now for revenue to recover to 2019 baseline in 2022. Reinitiate return of capital to shareholders in January – outstanding authorization is just over $9 billion. They expect to complete their remaining authorization within the next three years. That means buying back over 10% of their market cap over the next 3 yrs. at current valuation.

 

Revenue expectations for 2022 have been climbing and took another leg up after they reported…

 

 

Free cash flow is expected to recover to 2019 levels this year, and strong growth is expected to continue…

 

If you look at a P/E chart on the name it doesn’t give great perspective on their valuation. What looks like a higher P/E ratio in the chart below in 2020 and 2021 does not mean the stock was “expensive.” Results were impacted (earnings depressed) by Covid. And what looks like a little below average now is based on an average that is very skewed by those historical higher P/E’s during the depths of Covid…and add onto that, that current one year multiples are impacted by big forward growth expectations (e.g. 36% EPS growth expected in 2023).

 

Sarah Kanwal

Equity Analyst, Director

 

Direct: 617.226.0022

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

$BKNG.US

[category earnings ]

[tag BKNG]

 

Hilton 1Q22 Results

Share Price: $149            Target Price: $170

Position Size: 2.3%          1 Yr. Return: +22%

 

 

Key takeaways:

  • Very positive quarter and strong progress on recovery – system-wide RevPAR increased more than 80% YoY, driving adjusted EBITDA up 126%. RevPAR was approximately 83% of 2019 levels with adjusted EBITDA at 90%. Beginning of the Q was impacted by omnicrom but improved. US leisure travel continues to be a key demand driver and is expected to stay strong. Recovery of group, business transient and Chinese (still down 47% vs 2019) and European markets will all be added tailwinds going forward.
    • Leisure travel has more than recovered – leisure demand is well ahead of 2019 baseline.
    • Business travel is recovering – US business transient RevPAR increased, sequentially, versus the fourth quarter, with March down only 9% compared to 2019 levels.
  • “Inflation is our friend” – They have pricing power, re-price their product daily and have a significant portion of their revenues that are royalties tied to top line. Franchising is almost 2/3 of EBITDA and tied to top line, managing is another 25% of EBITDA where the fee stream is primarily base management fees (% of room revenue), with a smaller portion comprised of incentive management fees (% of hotel profitability). So, in an inflationary environment, pricing power = higher revenue growth and margin expansion.
  • Stable room growth ahead, underpins LT growth story – They expect 5% room growth this year, accelerating to 6-7% longer term. The pipeline (~400K rooms) represents ~38% room growth from their current installed base of  >1 million rooms and more than half are under construction (helps underpin several yrs. of predictable growth). Seeing very strong signings – rising rates not derailing development as demand for travel is increasing, hotels are the shortest duration leases in real estate and can increase prices w/ inflation, and in a tighter financing environment it helps to be associated w/ a banner, particularly one that commands the highest RevPAR premiums (which Hilton does). Almost 2/3 of their pipeline is located outside the US (franchise and mid-tier focus, tied to growing global middle class) – China is an important part of their pipeline and growth there is intact. Headwinds to construction from supply related issues (impacting unit growth this year) will abate.
  • Thesis playing out…profits recovering ahead of RevPAR as margins are going up…EPS this year is expected to be >14% above 2019 while RevPAR Tis expected to be 10% below. They expect permanent margin improvement versus prior peak levels in the range of 400 to 600 basis points over the next few years aided by cost efficiencies gained through Covid, including lowering labor intensity.
  • Reinstated buybacks a quarter earlier than expected – targeting  $1.4B-$1.8B for the full year in dividends and buybacks. Their fee-based capital-light business model and their industry leading RevPAR premiums coupled with further demand recovery, should continue to drive strong performance and meaningful FCF, which will enable them to return significant capital to shareholders. In the 3 years pre-pandemic, they reduced share count by ~15%…as RevPAR and FCF recovers, this level of buybacks should return.
  • Valuation – PT of $170 based on very conservative assumptions of significant revenue growth this year and next as RevPAR recovers, then top line growth reverting to the low end of pipeline growth (6%) over the next few years (which imbeds no RevPAR growth) and margins below guided expansion. I included a 5 yr. historical P/E ratio chart at the bottom of the page. While it shows Hilton trading at an average P/E ratio…it’s not a very helpful way to think about their valuation as earnings collapsed in 2020, then the stock quickly recovered when a vaccine was announced (well ahead of earnings recovering)…moreover the current multiple imbeds enormous growth this year and next as RevPAR recovers.

 

 

RevPAR (Revenue per available room) expected to be 10% below 2019 baseline this year…while EPS is expected to be 14% higher than 2019…

 

In the 3 years pre-pandemic, they reduced share count by ~15%…as RevPAR and FCF recovers, this level of buybacks should return…

 

$HLT.US

[category earnings]

[tag HLT]

 

Sarah Kanwal

Equity Analyst, Director

 

Direct: 617.226.0022

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

 

MSFT Q322 Earnings Update

Current Price:   $284                     Price Target: $375

Position Size:    8%                        TTM Performance: 13%

 

 

Key takeaways:

  • Broad beat & solid Q3 guidance. Azure continues to be a key driver of growth and is taking share (accelerated, +49% YoY…vs Google Cloud Platform +44% and AWS +37%).
  • Enterprise software is seeing robust demand and is a deflationary force…they sell products that help companies drive productivity and deal with inflationary pressures.
    • “in the conversations we are having with our customers…I don’t hear of businesses looking to their IT budgets or digital transformation projects as the place for cuts”
    • ”I have not seen this level of demand for automation technology to improve productivity”
    • “in an inflationary environment, the only deflationary force is software.”
    • “Businesses – small and large – can improve productivity and the affordability of their products and services by building tech intensity.”
    • ServiceNow’s CEO Bill McDermott (speaking on CNBC), “software is the most deflationary force in the world.”
  • Big and expanding addressable markets..
    • Tech is more & more strategic…and as a result is expected to double as a % of GDP by the end of the decade as companies shift spending from other areas in the organization. MSFT’s products are evolving from being primarily productivity tools to being more strategic (increasingly becoming part of the product and the go-to-market) as companies look to take advantage of new technologies (AI, AR, automation, IoT etc.) to grow and compete. So the value proposition of MSFT’s products to their customers is improving, which is key to the durability of their LT growth and profitability.
    • Cloud – well positioned with lots of growth ahead (see chart below). Cloud penetration has a ways to go as only 20-30% of workloads are in the cloud. MSFT is well positioned as more large enterprises, that are longtime customers, move to the cloud and they are growing their industry specific cloud presence which should be a driver of increased penetration.
    • Security –the attack surface is increasing w/ WFH and more distributed infrastructure. They have a >$15B security business (growing over 40%), making them one of the largest, fastest growing security businesses globally.
    • Gaming/Metaverse/Activision Blizzard – expected to close Acquisition by July 2023; would be MSFT’s largest deal ever ($69B net of cash). This represents not only investment in their gaming business (already well positioned), but also in the metaverse – it could make Microsoft the largest player in the metaverse, and the only company with a dominant position in gaming hardware, cloud services and content. MSFT has been working on building their original game content and Activision Blizzard’s library of original games and game developer talent would add to that.  In terms of the metaverse…video games represent key potential metaverse content and MSFT, w/ their HoloLens headset, has the #2 virtual reality hardware (second to Meta/FB’s Oculus headset) underpinning the immersive aspect of the metaverse. MSFT is focused on other metaverse aspects as well, including new collaboration capabilities (e.g. joining Teams meetings w/ avatars), they plan to roll out software tools related to metaverse content development and already seeing enterprise metaverse usage from smart factories to smart buildings to smart cities. They’re helping organizations use a combination of Azure IOT, digital twins and mesh to simulate and analyze any business process.
  • Well positioned – entrenched enterprise customer base (better positioned for hybrid cloud adoption); superior offering across the stack (SaaS, IaaS, PaaS); desire for multi-cloud environments (mitigate vendor lock-in risk); Power Platform (low-code, no-code tools, robotic process automation, virtual agents and business intelligence) which makes it easier for companies to incorporate new technologies.
  • Attractive valuation:
    • Valuation has gotten cheaper…trading at ~3.5% FCF yield on calendar 2022. A premium to the S&P (~4.5%) and, of the mega cap tech names that we own, this is the most expensive…but supported by a high moat, strong margins, robust secular growth and the absence of antitrust scrutiny.
    • Recurring revenue is >60% of total, underpins most of their valuation and is resilient and poised to be a greater part of the mix. Key to this is Commercial cloud (aggregates Azure, Office 365, the commercial portion of LinkedIn and Dynamics) which grew +35% YoY and is at >$90B annual run rate (Azure is about half of that).

 

 

 

 

 

 

Sarah Kanwal

Equity Analyst, Director

 

Direct: 617.226.0022

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com