We had the opportunity to spend some time with both Dollar General (DG, Outperform, Target Price $165) and Tractor Supply (TSCO, Peer Perform, Fair Value $106) senior management teams (CEO, CFO and IR), as well as walk through the stores on Tuesday in Nashville.
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Best Buy report strong 2Q EPS before the market opened on 8/29 and raised guidance, however the sales outlook was a bit muted and there remain concerns around the impact from tariffs specific to the company, but also in relation to consumer demand. This, we believe, led to a selloff in the equity. With that said, our research suggests the company remains a unique operator, as it is one of the only companies with a national footprint to showcase the plethora of new devices and technology slated to come to market over the next 12-36 months. Further, the company continues to invest in its service offerings through acquisitions, partnerships, and programs such as Total Tech Support. Taken together, we believe BBY is setting itself up for sustainable, long-term growth. With valuation attractive, in our opinion, Best Buy remains one of our top long-term ideas and we are reiterating our Outperform rating.
Our Walmart CPG price tracker through last week shows a continuation of price cuts, especially in Food. Our Food basket is flat sequentially and down 1.1% y/y, while our HPC basket is down 0.3% sequentially and up 0.9% y/y. For U.S. based food companies, we continue to see risk around the pricing environment if Walmart reinstates a new round of price cuts.
. It appears that LOW is making progress in addressing the gross margin issues that arose in 1Q19, and that it continues to have several initiatives that should lead to stronger margins going forward, a more productive asset base, and drive incremental sales growth. The company is currently undergoing significant changes to its store inventory and supply chain, merchandising and pricing analytics with its integration of Boomerang Retail Analytics, as well as its website with its re-platforming of Lowes.com to Google Cloud (HD did this over 3 years ago). As such, we continue to forecast continued gross margin improvement as well as SG&A leverage into FY20, and believe that further store changes should help accelerate sales growth as well as enhance EBIT margin and ROIC. As such, we are reiterating our Outperform rating and CYE19 $125 Target Price.
HD is a brick house capable of standing up to the multiple headwinds facings the home improvement market. Comparable sales of 3.0% were respectable especially given the difficult weather in May as well as mixed housing macro data, and earnings surprised despite the company’s ongoing investments into developing an industry leading omnichannel business. Looking through the end of the year, we continue to see upside for HD as the company expands its direct distribution and one-day delivery infrastructure, continues to roll-out in-store efficiency improvements, and navigates through the turmoil caused by trade disputes and broader macroeconomic uncertainty. We view the company as among the better positioned to mitigate the impact from tariffs as its vendors shift manufacturing and we continue to view the fundamentals for home improvement spend in the U.S. as being supportive of HD’s long-term growth.
Topics this weekend…Target's Tidings - TGT 2Q19 Consumables Corner - BJ 2Q19 Hardline Happenings - HD 2Q19 and LOW 2Q19 Quote of the Week – Walmart, Inc. (WMT, Underperform, $105 PT) President and CEO, Walmart eCommerce U.S., Marc Lore on the 2Q20 Media Call
Tariffs continue to be a tax on U.S. consumers and no sector, company, or consumer is likely to be untouched. Indeed, with List 4 of tariffs being brought into play this past week and the market’s sharply negative reaction, we wanted to take a look at the potential impact it would have directly on consumers and companies’ sales. Tariffs are effectively a tax on U.S. consumers/companies and could result in lower spending although some sectors will be more impacted than others according to our research. Based on our prior research around consumers’ marginal propensity to spend (here) coupled with a sensitivity analysis around average tariff rates and the amount of which are borne by the consumer, it appears housing, transportation, food away from home and entertainment (electronics) could face the most significant pressure.
Tractor’s multifaceted approach to driving incremental sales through Neighbor’s Club, its private label credit card, Stockyard kiosks, and Buy Online Pickup In Store seem to be having a positive effect on comps, despite the headwind of a very wet Spring. However, the company experienced some delays with new store openings in 2Q19 which will likely be a headwind for overall sales into the back half of the year, on top of lapping last year’s hurricanes. Further, despite consumables (pet food and supplies, animal feed, etc.) being the strongest category in 2Q19, we see significant competition building, particularly in Pet, given the increasing success of Amazon, Walmart, and Chewy.com in this category. Taking all of this together with a valuation that is above historical averages, we continue to rate the equity Peer Perform.
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