With bankruptcy proceedings ongoing since October, we have seen reports that CEO Eddie Lampert’s hedge fund ESL is continuing negotiations with a bid greater than $5bn. While we do not know when a resolution could be finalized, we view liquidation or continued asset disposals as likely outcomes. In this note, we analyze the potential impact to what we view as the four key beneficiaries from our coverage (HD, LOW, WMT, TGT) from a potential total liquidation of Sears and Kmart. While liquidation would likely be a headwind temporarily, it would likely drive incremental sales longer-term. The estimates below are representative of the high-end of the potential benefit and are not specifically included in our current forecasts, as many of the sales could be outright lost, could shift to other retailers not considered in this analysis (private or public), or could move online. Also, liquidation sales could serve as a headwind in the near-term as these locations close and discount merchandise
Search Coverage List, Models & Reports
Search Results1-10 out of 162
The calendar may have turned, but the challenges impacting the Food Retail and Food Producers industries remain unchanged. The groups are marred by slow sales growth, higher costs, falling returns and subpar balance sheets. We do not believe 2019 will see any deviation from these difficulties as they appear largely systemic and, as such, we continue to advise investors to underweight Food Retail and Food Producers. In our opinion, while a sharp economic slowdown would clearly hurt if it were to materialize, the Hardlines Retail industry still appears poised to see robust sales growth fueled by a strong consumer, stable margins, and higher ROIC. These companies also have solid balance sheets and a penchant to return cash to shareholders. With valuations reasonable, we continue to suggest investors overweight Hardlines Retail. Finally, the Broadlines Retail industry is seeing sales grow rapidly, in part due to the strength of the economy, but with labor expenses increasing and with the need for omnichannel investments, EBIT growth and better ROIC remain elusive for some. While this causes us to advise market weighting the Broadlines Retail industry, we do believe there are opportunities for outperformance (AMZN, DG) and underperformance (BJ) within the group.
Today (12/6/18), Home Depot hosted a sell-side lunch with CEO Craig Menear and CFO Carol Tomé in attendance. The management team highlighted a continued focus on capturing more share of the Pro market, improving associate productivity, and enhancing its omnichannel capabilities, particularly in the B2B category. Further, the team acknowledged an aggressive stance on share buybacks, raising the company’s share buyback target for the year to $10bn from $8bn, which was just raised from $6bn in the company’s most recent earnings (11/13), as management believes the equity is currently trading below intrinsic value. The stock is down ~0.3% today.
Home Depot reported a better-than-expected third quarter yesterday morning (11/13/18) and lifted its outlook for the year. However, the equity continues to flounder as concerns mount around the economic cycle generally, and the health of the housing market specifically. We recognize that the housing-related data has weakened over the last six months, with the down mortgage applications this morning representing “Exhibit A” in this trend. The challenge when evaluating HD is that the future is far from written whether we see an economic downturn in the near term. With that said, Home Depot is a best-in-class retailer, with an equity valuation that is below historical norms, both absolutely and relative to the S&P. Balancing the uncertainty around the macro backdrop and the strength of Home Depot’s franchise, we continue to believe the risk/reward is favorable for owning HD shares.
Would you rather own WMT, which we estimate next year will grow net sales at approximately 4%, shrink EBIT by approximately 2%, shrink EPS by approximately 3%, and is trading at a valuation of over 20x NTM P/E (around 5x above its 10-year average of approximately 15x)… or would you rather own HD, which (on a 52-week basis) we estimate next year will grow net sales at nearly 6%, EBIT by approximately 7%, EPS by approximately 9%, and is trading at a NTM P/E valuation of approximately 18x (in-line with its 10-year average). Both companies have similar FCF yields of just below 5% next year. However, the shift to omni-channel is profit eroding and capital destructive for WMT, whereas HD is implementing changes in its store base while also improving profitability and returns. Conventional wisdom tells us that Staples Retail is a defensive sector with stable cash flow in times of market volatility, but the big question in our mind is whether the structural disruption in the industry (with omni-channel investments) changes the narrative for WMT. HD, on the other hand, is more exposed to Consumer Discretionary, which could slow in a down market. With rising interest rates eating into record high affordability index rates and lackluster housing starts in September, we see the recent slowdown as a return to the norm, and the fundamental drivers for home improvement retail in the U.S. to remain strong longer-term (Climbing the Wall of Worry). To us, the underlying fundamentals for Home Improvement retail are on more solid footing than Staples Retail. On a company specific basis, HD is growing earnings at a much faster rate, while simultaneously investing in its business for the long-term in a way that doesn’t destroy capital today. All this, coupled with a relatively lower P/E, makes HD our clear pick of the two.
On Friday 9/14/18, we hosted a Home Depot store tour at the newly built Stamford, CT location led by the Regional Vice President of the New York Metro Region, Tony Lemma. Home Depot continues to take care of its business by focusing on improving the productivity of its stores. The store includes almost all of the company’s latest technologies and improvements. The focus is to improve store and labor productivity and to increase the sales throughput. Indeed, we left incredibly impressed around the company’s efforts to use technology to create a seamless omni-channel experience while also reallocating labor to customer-centric activities. However, if there is one thing that we believe continues to set Home Depot apart from others, it is the strength of its culture, which was personified by Mr. Lemma and his team. With the current strength of the economy and our positive outlook for Home Improvement retail (outlined in our note Climbing the Wall of Worry), combined with Home Depot’s operational acumen and strong culture, HD remains one of our favorite equities and we are reiterating our Outperform rating.
According to the National Hurricane Center, Hurricane Florence is forecast to land in the Carolinas (Please see the center’s website for their forecast). Lowe’s has 115 stores in North Carolina, with 49 stores in South Carolina and 71 stores in Virginia, representing approximately ~6%, ~2%, and ~3% of its total store base post the closing of Orchard Supply. Home Depot has 40 stores in North Carolina, with 25 stores in South Carolina and 49 stores in Virginia, representing approximately ~2%, ~1%, and ~2% of its total store base. With more exposure to areas that could potentially be impacted by the hurricanes, Lowe’s, relative to Home Depot, could see more of a benefit from preparation as well as repair spending. For reference, in 3Q17, LOW’s comp sales benefited by approximately 140 bps, while HD’s comp sales benefited by approximately 120 bps from Hurricanes Irma and Harvey. Both companies indicated a slight negative impact to margin from the hurricanes last year.
An aging population and an aging housing stock are good news for home improvement retailers. As seen in the chart below, the U.S. housing stock has aged significantly over the last few decades. Older homes require more maintenance, which is good news for companies like Home Depot, Lowe’s and Sherwin-Williams. Coinciding with the aging of homes is that the U.S. population is also aging, and the U.S. Census data shows that spending on housing increases as we age, peaking when individuals reach 65-74 (see Exhibit 10 in Climbing the Wall of Worry). This would suggest that the large Baby Boom population will continue to spend robustly on their homes. And, of course, the Millennials are finally aging into important life events like first birth, first marriage and first home. In our opinion, all of this suggests that the demand will remain strong for home improvement retailers even as higher interest rates slow down the overall housing sector.
LOW reported 2Q18 this morning (8/22/18) with comparable sales of 5.2% (vs. Wolfe 5.0% and the Street 5.4%) and EPS of $2.07 (vs. Wolfe and Street of $2.02). The company announced that it would close the Orchard Supply business which had approximately 100 stores at the end of FY17. LOW also lowered its outlook for the remainder of FY18, lowering full-year comp guidance to 3.0%, down from prior 3.5%, and lowering EPS guidance to $4.50 to $4.60, down from prior $5.40 to $5.50. The new EPS guidance is inclusive of approximately $0.60 estimated full-year impact from the closing of Orchard Supply, and excluding this, core EPS guidance appears to be lowered to approximately $5.15 at the midpoint, down ~5.5% from the prior $5.45 midpoint. Lastly, the company announced that it would hire David Denton as CFO. David Denton is currently the CFO of CVS, and will join Lowe’s upon completion of the CVS/Aetna merger.
With interest rates increasing and the housing marketing cooling off, particularly in formerly “hot” areas like Seattle, home improvement retailers (Home Depot, Lowe’s and Sherwin-Williams) have seen their equities languish lately as other retailers vault higher. The mantra from investors is that the housing cycle is coming to a close and it is time to underweight these retailers…we disagree. Indeed, our research suggests that demand for home improvement products and services is likely to remain strong driven by a robust consumer, an aging housing stock and positive demographic trends. We view the pull-back in some housing markets as a pause that is likely to refresh, rather than the beginning of another housing crisis or even the beginning of a sharp downturn. With the equity valuations slightly under the historical averages on a P/E basis and with our view that sales momentum should continue, we are reiterating our Overweight rating on the sector and our Outperform ratings on HD, LOW, and SHW.
- 1 of 17
- next →