Topics this week…Consumables Corner – 1) U.S. store growth is full steam ahead, with discounters leading the way, 2) Discounters tend to bring down prices in surrounding areas, and 3) BJ’s earnings preview Amazon A to Z – The meal delivery trend shows no signs of slowing with Amazon’s recent investment in Deliveroo Quote of the Week – Home Depot CFO, Carol Tomé, on the U.S. housing market
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Home Depot reported 1Q19 earnings at 6:00am (05/21/19) ET this morning. Comp sales of 2.5% compared to our 4.5% estimate were driven lower by lumber price deflation and weather (200 bps impact). However, EBIT dollars were ~1% above our estimate as the company grew sales by 5.7% y/y, above our 4.6% y/y estimate (reflecting a calendar shift impact). While the operating results fell in-line this quarter, we expect ongoing lumber price deflation to weaken the sales outlook for 2Q and possibly the rest of the year. As one of the best-run retailers, in our opinion, we do expect the strategic initiatives being implemented by the team at HD to at least partially offset some of this weakness. Indeed, the team reaffirmed its FY19 comp sales outlook of 5.0%, however, if lumber prices remain at current levels the comp impact is expected to be around 0.7%. Moreover, while key housing metrics such as home price appreciation and existing home turnover appear to be constructive over 2019, recent data has been mixed, at best. Putting it all together with a leadership team that is driving strong free cash flow generation through the enterprise, we continue to view HD as a must-own equity. As such, we remain Outperform rated and are raising our price target to $209 from $200.
If WMT can repeat its 1Q20 performance going forward without slowing sales, there could be significant upside to our estimates. From our perspective, however, we think that in order to maintain the level of sales Walmart is experiencing, the company will likely need to invest more in price, more in wages, and more in ecommerce logistics with 1-day shipment and assortment. As we discussed in our post-earnings note and downgrade to Underperform, central to our thesis is that WMT is mining its U.S. store fleet to fund ecommerce initiatives abroad and that many of the benefits experienced are likely to fade as price gaps to competition begin to slow traffic growth in the core U.S. business. Indeed, the quarter was marked by a surprisingly profitable Walmart U.S., partially offset by a surprisingly less profitable Walmart International.
SPTN reported 1Q19 earnings on Monday 5/20 before the market open (preliminary results were released on 5/9). As we had previously highlighted, company-specific challenges (voluntary recall of fresh-cut melon products, operational issue at one of its distribution facilities, etc.) are likely to have an outsized impact on SPTN’s profitability this year. Add to this a tough operating environment, including competitive price pressures and benign inflation, especially on the retail side of the business, and we see a tough road ahead for the highly experienced senior leadership team at SPTN. The team has hired outside consultants to improve the profitability of its Fresh Kitchen operations and has also hired a new Chief Marketing Officer and new Chief Information Officer. Coupled with further upcoming senior management appointments including a new President of Distribution, and the team seems to be focused on trying to eke costs out of its supply chain, as freight and labor costs continue to inch higher. Balancing a challenging operating environment with a valuation that remains reasonable, we are Peer Perform rated on the equity. The equity was down -1.4% on Monday.
Our total Walmart basket is up very slightly from the prior week, with the largest changes being potato chip price increases (+12.6% sequentially, -1.3% y/y) mostly offset by pretzel price decreases (-7.8% sequentially, -5.2% y/y). Our total Walmart basket remains up y/y (+1.0%) driven primarily by HPC (+1.8% y/y) and Pet (+4.4% y/y). Of note, CPB continues to face difficulty on the pricing front, and although the move in pretzels is seasonal, the price decrease for the spring/summer seasons this year happened later and is around 7% below last year’s spring/summer decrease. Coupling this with our view on the difficulties facing the company in its core soup category and we remain Underweight rated on CPB ($32 PT), which is set to report its 3Q19 earnings on 6/5.
Topics this weekend…
Walmart’s World – WMT’s 1Q20 was strong, but we think is supportive of our underlying Underperform thesis longer-term
Amazon A to Z – Pedal to the Metal
Hardlines Happenings – Tariff impact analysis on HD, LOW, and BBY
Target’s Tidings – TGT earnings preview
Quote of the Week – Ford CFO Time Stone’s comments on AMZN/Whole Foods
Management’s efforts to revitalize its core U.S. business by focusing on growing its largest and most profitable brands and to rationalize its portfolio by discontinuing and divesting non-core assets seems to be succeeding, but it is certainly a long road ahead. As the largest manufacturer of on-trend natural and organic products and the largest supplier into Amazon’s Whole Foods, further business stabilization could result in a higher equity price. That said, total sales are not expected to grow until FY22, and margins will need to significantly expand in order to grow absolute profit dollars and returns. Additionally, HAIN’s divestiture of Pure Protein for $80mm was well below our expectation, and we need to acknowledge the risk that future asset divestitures are priced lower than expected.
Walmart reported 1Q20 earnings this morning (5/16/2019) before the market opened with U.S. comps of 3.4% (in line with our and Consensus estimates) and Adj. EPS of $1.13 (above our and Consensus estimates of $1.02). Walmart U.S. EBIT came in above our expectations ($4.1bn vs our $3.8bn), Sam’s Club EBIT was above our expectations ($0.5bn vs our $0.3bn), and International EBIT came in below our expectations ($0.7bn vs our $1.0bn). In Walmart U.S., gross profit rate expanded 6 bps and operating expenses leveraged 10 bps. Guidance for the full year was reiterated. The equity is up approximately 2.7% as of 12:00pm ET following the report.
TSCO hosted its analyst day today (5/15) in Tennessee. In attendance and giving presentations were CEO, Greg Sandfort, COO, Steve Barbarick, CTO, Rob Mills, and CFO, Kurt Barton. The presentations largely focused on the advancement of the ONETractor strategy, growth of Petsense locations, utilization of Neighbor’s Club and Stockyard kiosk initiatives, and the company’s long-term financial outlook. In regard to the long-term financial outlook, most targets were unchanged, however the share repurchase target was adjusted to a 2.5% to 3.5% annual net share reduction from $300mm to $400mm. Further, management guided to the lower end of its 7% to 9% long-term net sales target range, given that new store growth is slowing as the store base increases. The equity is down ~1.4% as of the market close.
Topics this week…
Walmart’s World – 1) Is Walmart underinvesting in labor?, and 2) 1Q20 Earnings Preview
Consumables Corner – Birth rate data hits lowest level since 1986
Amazon A to Z – 1) Amazon has best-in-class shipping, and 2) Amazon is unrivaled in fulfillment
Quotes of the Week – Amazon is supporting employees starting their own package delivery businesses
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