We think DIY strength has continued into mid-May as consumers remain at home and take on more project work amid favorable spring weather. Notable categories with outsized growth include paint, lawn and garden, outdoor power equipment, cleaning supplies, and are all contributing to much larger ticket sizes. This tracks consistent with recent sector data points we highlighted on April 29th and May 6th.
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We’ve seen improved demand across several segments of the consumer landscape. Most discretionary categories appear to have bottomed-out in late March / early April and have subsequently improved week-to-week, with less discretionary categories like home improvement enjoying healthy demand over the last 2-months. Changes in vacation spend and summer plans (fewer camps, sports, etc.), are likely helping, but the big unknown over the next few quarters is whether the demand we’re seeing is sustainable in light of higher unemployment and lingering economic impacts from coronavirus.
Early this morning (04/29/20), Sherwin-Williams (SHW) reported Q1 results and provided updated guidance for Q2 and full-year 2020. The company’s conference call ended a short while ago and included a number of positive comments for the broader paint category near-term. Consistent with our most up-to-date checks in the home improvement space, we view these latest observations as further positive readthroughs for Lowe’s (LOW), which operates an exclusive partnership with SHW for certain products, as well as Home Depot (HD).
Earlier this morning (04/29/20), Sherwin-Williams (SHW) reported overall solid Q1 results pre-COVID 19 - in line with the company’s March 19th update. Management sounded a positive tone towards U.S. architectural paint demand early in the year consistent with our recent checks, although softness abroad and in other categories continues to limit top-line growth. Pressures are likely to mount throughout Q2 with consolidated sales now expected down low-to-mid teens.
Adj. EPS of $4.27 missed our $4.42 (Consensus $4.39). Adj. EBIT of $560mm was below our $606mm (Consensus $575mm). Paint SSS while healthy at 4.6% were below expectations.
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.
N.A Stores delivered SSS of 8.1%, coupled with 37% incremental margins, leading to 120bps of EBIT margin expansion. Looking at Exhibit 1 and 2, SHW has outpaced its closest competitor PPG and the overall market as its strong company-owned store footprint, salesforce, and delivery network continue to lead to outsized market share gains.
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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