RH reported largely better-than-expected Q1 results post-market in which overall sales contracted (19%) due to temporary store closures. After moderating to (40%) towards the end of March, demand trends improved sequentially to +7% in May and are now trending +11% early into June. A top-line rebound over the back half of the year, coupled with other operational improvements, is expected to drive year-on-year operating margin expansion at RH.
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Ahold announced another bolt-on M&A deal where it will be acquiring 62 stores from Southeastern Grocers. The deal will allow it to infill some rural areas in Georgia and the Carolinas while capitalizing on the strength of the Food Lion banner. We think this deal fits well with its strategy of consolidating the fragmented food retail industry through thoughtful M&A (we discuss this in detail in our May 28th initiation) and should draw on its solid track record of successful integration (e.g. Delhaize acquisition in 2016).
Our latest checks across the home improvement space suggest spending on DIY projects has not slowed and pro activity continues to improve. This is consistent with our prior checks (through May 15th) and initial Q2 commentary from both Home Depot (HD) and Lowe’s (LOW). Top-line trends are expected to remain elevated for some time as consumers remain in a stay-at-home mindset.
Costco reported May sales that we think will likely assuage some investor concerns about a prolonged traffic slump. In the US, traffic improved sequentially to -4.8%, which was a significant improvement from the -16% decline in April during the peak of the COVID crisis. Discretionary comps also showed signs of improvement with hardlines/softlines comps both solidly positive in May. We think the consumer trend towards combining shopping trips will benefit retailers like Costco that allow its members to shop for their entire home in one trip. This trend could set Costco up well for market share gains.
Dunkin’ Brands’ business update reflects continued week-over-week improvement in US comp trends, though the results highlight that recovery in QSR coffee continues to lag other QSR categories. Dunkin’ US comps have improved to -15% vs. a trough of -35% and a -25% run-rate from the week ended April 25th.
Shift to digital business likely accelerated by the COVID crisis but management is working to quickly adjust cost structure to adjust to the shift away from studio. The transition could lead to some noisy quarters but underlying trends are strong.
Duncan stressed that exclusive agreements are “conditionally exclusive” and that there are clauses in each contract that incentivize partners to continue growing the channel.
Despite recent disruptions and temporary 1x costs, the company appears confident it can return to prior margin performance (e.g. 25% CRM on $2.5mm AUV; the ultimate mix of sales will impact the profitability somewhat).
Momentum across the system remains strong and the brand hasn’t seen any big change in performance within reopened states despite the increase in competition.
To-Go sales appear pretty sticky even as states lift shelter-in-place orders; the company was seeing nice momentum across geographies when it previously disclosed April trends.
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