We recently assumed coverage of the Hardlines Retail sector with Outperform ratings on both Home Depot (HD) and Lowe’s (LOW). Last night after the market close, Scotts Miracle Gro (SMG) positively pre-announced Q2 (March) results highlighted by a surge in demand for lawn and garden products throughout the month of March. We interpret this as another near-term positive for home improvement retail, consistent with our checks earlier in the week.
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Our checks indicate a sharp acceleration in top-line trends beginning in early March following a somewhat slow start to 2020 (mild winter weather an overall negative). During the COVID-19 crisis, a number of consumable type items including water, disinfectants, cleaning supplies, chemicals, masks, etc. have seen the strongest gains. Other categories including paint, lawn and garden, and even power tools are also experiencing above normal growth and benefitting from consumers staying at home and likely completing DIY projects.
We are assuming coverage of Hardlines Retail as part of our wide-ranging perspective on the consumer. As we reflect upon an incredibly turbulent start to the year (S&P 500 now down 24% year-to-date vs. our Hardlines Index down 25%), we believe the recent onslaught for the group now affords an entry point into a number of well-positioned, high quality names. We want to be very clear here. Our updated investment ratings reflect relative positions within the group and are not an overall call on the broader market. Risks to spending are now percolating as the effects of COVID-19 ripple through the consumer economy and are likely to induce rising levels of unemployment and a confidence-driven pullback - the depth and duration of which we cannot know for sure.
SSS of 5.2% was above our 5.0% and Consensus 4.8%. EPS of $2.28 beat expectations primarily on a lower tax rate (EBIT/interest expense was mostly in-line). HD reiterated its 2020 sales and EBIT margin outlook and provided FY20 EPS guidance of $10.45 vs prior Consensus $10.51. Shares were +1% vs -2% for S&P500.
With concerns over the Coronavirus spreading, we think US Retailers will likely be viewed as near-term relative safe-haven stocks given limited direct exposure to China. However, should the virus spread into a pandemic, especially in China, we see a greater impact to US retailers from indirect supply chain exposure or US GDP growth.
To help gear up for 2020 we analyzed 2019 performance, identified 10 key themes into 2020, analyzed post Q3 earnings reaction, and analyzed the key issue facing each stock under coverage into 2020.
HD held its biennial analyst day, which largely reiterated the substance of its original 2017 plan. Contrary to historical precedent of beating and raising, HD cut its long-term targets, but we believe this was already expected. Shares were down approx. -2% throughout the day.
On 12/11, HD is hosting its biennial Analyst Day. Historically, while very informative, HD analyst days have had small impacts on the stock with performance of -1% to +1% versus the S&P but with generally better follow through over the +1 month (Exhibit 1). However, this time could be different as HD shares significantly underperformed the market over the past 45 days and there has been investor angst over 2020 growth and margins.
SSS of 3.6% was below our 4.8% and Consensus 4.7%, although buyside expectations were low due to softer CC data. EPS of $2.53 was slightly ahead of consensus but missed our $2.58. HD lowered its comp outlook for the year but reaffirmed EPS growth guidance. Shares -5.4%.
Two weeks ago, we assumed broader coverage of Hardlines and Internet Retail and issued four deep dive reports including a downgrade of LOW to Peer Perform and reiterated HD, BBY, and W at Outperform. We also assumed coverage of AMZN, ULTA, WSM, RH, TSCO, and SHW (see our 1-page tear sheets here). Finally, we utilized the broader coverage as an opportunity to reposition our legacy auto part retail coverage and downgrade AAP to Underperform and upgraded ORLY to Outperform.
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