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.
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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.
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.
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.
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.
SHW’s reported comp sales of 4.3% came in ahead of more subdued market expectations given the abnormally high rainfall in 2Q. The strength of SHW’s paint franchise was evident in that its exterior segment actually grew faster compared to its interior segment as customers ramped up buying on less rainy days. Although full year EPS guidance was reaffirmed, full year sales guidance was taken down a notch, as continued strong performance in North America is expected to be offset by ongoing uncertainty in pockets of SHW’s Consumer Brands and Performance Coatings businesses. Stepping back, the equity’s reaction yesterday (up almost 8%) is ahead of what the comp and earnings beat would imply, in our opinion, and we would expect a pullback over the next few trading days. Balancing SHW’s scale and franchise with a valuation that appears to be stretched, we are reiterating our Peer Perform rating.
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