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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Wolfe Research's Senior Hardlines & Internet Retail Analyst Chris Bottiglieri hosted a webcast to discuss his downgrades of AAP and LOW, bottom-up TAM analyses on both home improvement retail and auto parts retail, his valuation black box: what is driving retail valuations, and more.
Today (10/07/19) we are assuming broader coverage of hardlines and internet retail with deep-dive reports on four companies, including a LOW downgrade to PP. We also have two ratings changes from our existing retail coverage (AAP to UP and ORLY to OP), and assuming coverage of six additional retail names with concise 1-page investment tear sheets.
We are downgrading LOW shares to Peer Perform with an CY 20 price target of $118 using its current NTM 11.75x EV/EBITDA on below Cons 2021 EBITDA. Our positive near-term view is offset by long-term margin expectations and the potential for greater than expected investments.
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.
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.
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