瑞信-美股-零售行业-北美家装零售：二季度需求触底但价值达到顶峰-2019.7.10-27页 (2).pdf

Home Improvement Retail Stable on the Home Front QTD in Q2;Demand Closer to Bottom,but Valuation Closer to the Top;Remain on the Sidelines DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES,ANALYST CERTIFICATIONS,LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS.US Disclosure:Credit Suisse does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment decision.Equity Research Americas Seth Sigman Research Analyst(212)538-8043 seth.sigmancredit- Kieran McGrath(212)325-5158 kieran.mcgrathcredit- Lavesh Hemnani(212)325-5302 lavesh.hemnanicredit- July 10,2019 2 7/10/2019 Playing out as expected through early July;We believe that Q2 sales trends are tracking as expected based on our macro/seasonal indicators and store visits,with indications that growth should reaccelerate modestly in 2H based on both macro and company specific drivers.But,thats all consistent with consensus estimates.Further,for the stocks,while the recent run up may be warranted based on key stock indicators(namely lower rates),it feels like valuation is closer to the top now.Meanwhile,the 25%tariff for HD,lumber deflation for both,and LOW Q2 GM,still feel like headline risks.We remain on the sidelines.There are no changes to our estimates.1.Our leading macro indicator moderated in Q2,as expected,and points to some improvement in 2H,but still below the prior run-rate;For HD this supports our US comps of 3.5%vs.consensus 3.6%,and points to 2H in the 4.0-4.5%range,before considering upside from initiatives vs consensus 6.0%.For LOW,it should support comps at least in line with consensus 2.1%,and 2H in the 4.0%range vs consensus 3.8%2.Seasonal trends started weak,now improving,July key;Our seasonal indicator shows a weak start to Q2 due to weather/difficult comparisons,with an improvement starting Memorial Day,and strength continuing into June.Achieving Q2 est.will depend on a stronger July,as comparisons ease.Google Trends shows similar trends.3.Deflation worse vs.Q1,although improved intra-quarter;Our commodity index points to a 50-70 bps impact in Q2 vs.50 bps in Q1 for HD.Lumber prices are-36%QTD vs.-27%in Q1.Based on current commodity prices,we would expect deflation to be more modest in Q3,with a return to inflation in Q4.It also would suggest a FY impact for HD of-22 bps vs.the 70 bps FY scenario it discussed in May when reporting first quarter results.4.Promotional trends mixed;(i)Higher email count for LOW in Q2,lower for HD.(ii)Longer holiday sales periods for LOW;Memorial Day lasted 22 days vs 14 last year.Fourth of July savings started earlier(appliances);June 20 vs June 28 last year.HDs Memorial Day period was the same length y/y.(iii)Discount levels slightly higher for LOW y/y,HD has been similar.5.Home price trends still mixed,with our custom HD/LOW home price indices(store and population weighted)continuing to moderate,which contrasts with the national indices that have started to stabilize.The home price spread continued to widen in LOWs favor.6.Stock analysis key macro indicators favorable,particularly interest rates,which should be supportive of current premium in relative valuation,but doesnt necessarily support meaningfully more upside.LOW valuation is more compelling,but the catalyst for us is still less clear.Our estimates;For HD,we continue to model Q2 US comps 3.5%vs.cons.3.6%/EPS$3.09,in line with cons.For LOW,we model US comps 1.9%vs.cons.2.1%,with EPS$1.99 vs.cons.$2.01.We lowered our Q2 est.recently to reflect similar GM pressure as in Q1.Home Improvement Retail Stable on the Home Front QTD in Q2;Demand Closer to Bottom,but Valuation Closer to the Top;Remain on the Sidelines Key Stock Charts:Macro Drivers Should be Improving,but Valuation Starting to Reflect That HDs 20%premium to the market seems supported here based on the quality of the franchise,its offensive positioning,and housing/macro drivers,but its closer to prior peak levels(when both top-and bottom-line growth had been much stronger);LOWs in-line multiple is above recent levels but further from peak and reflects some skepticism.While that may be an opportunity,the catalyst is less clear Source:Company data,Credit Suisse,NAR,Fannie Mae Relative Valuation vs PFRI/GDP Index Relative Valuation vs CS Macro Indicators 1.30 1.20 1.18-20%-10%0%10%20%30%0.851.051.251.451.65HD Rel NTM PEPFRI minus GDP1.30 1.02 -20%-10%0%10%20%30%0.550.750.951.151.351.551.75LOW Rel NTM PEPFRI minus GDP1.18 -20%-13%-6%1%8%0.91.01.11.21.31.41.51.6HD Rel NTMMacro Stock Indicator1.02 -34%-27%-20%-13%-6%1%8%0.70.80.91.01.11.21.31.41.51.6LOW Rel NTMMacro Stock Indicator7/10/2019 3 Lower Interest Rates Have Been One Driver of HDs Recent Move,While LOW has Lagged HDs relative valuation near prior levels when rates were declining(over last five years),while LOW is trading well below where it has been historically during periods of declining rates 4 Source:Company data,Credit Suisse,Factset HD&LOW Relative NTM vs 10 Yr Rates(INVERTED)HD&LOW Current Valuation vs.Past Periods of Changing Interesting Rates 0.01.02.03.04.05.06.00.60.81.01.21.41.61.8Mar 04Nov 04Jul 05Mar 06Nov 06Jul 07Mar 08Nov 08Jul 09Mar 10Nov 10Jul 11Mar 12Nov 12Jul 13Mar 14Nov 14Jul 15Mar 16Nov 16Jul 17Mar 18Nov 18Jul 19HD Rel NTM PE10 Year(1.0)0.01.02.03.04.05.06.07.00.60.81.01.21.41.6Mar 04Jan 05Nov 05Sep 06Jul 07May 08Mar 09Jan 10Nov 10Sep 11Jul 12May 13Mar 14Jan 15Nov 15Sep 16Jul 17May 18Mar 19LOW Rel NTM PE10 YearHDLOWCurrent NTM Relative PE1.181.01Average NTM Relative PE,Last 5 YearsWhen Rates Declining Y/Y1.211.13When Rates Increasing Y/Y1.160.99Average NTM Relative PE,Last 5 YearsWhen Rates Declining Y/Y 50 bps1.211.16When Rates Increasing Y/Y 50 bps1.150.987/10/2019 Key Data Points Summary 5 Leading macro indicator lower in Q2 as expected/points to improvement in 2H but in-line with estimates/below prior run-rate;Our indicator,which incl.EHS,home prices,interest rates,real PCE and inflation,among others,points to in-line Q2 comps in the 3.5-4.0%range for HD,with forecasts supporting some level of improvement in 2H to the 4.0-4.5%range.That would be below the 6%+in 2017/2018 and below implied guidance,although it does not consider incremental lift from company-specific initiatives which will become more important.Short-term,data points decelerate in Q2 as expected;SpendTrend for Home Improvement in 2Q19(through 1H June)+1.2%vs.+1.9%in Q1,incl.+2.0%in 1H of June,+0.3%in May,vs+3.0%April,and+3.4%in March.Two year stacks remain weak,but compares do ease slightly in July.That is important,as the data/past relationship would imply a bigger acceleration is needed for HD in July.Our analysis of Google Trends for home improvement related categories confirms slower growth QTD but has been improving.Comps bridges show difficult compares in Q2,but supports expectations for better 2H:HD/LOW face difficult weather/seasonal compares in Q2,while both retailers continue to lap Hurricane sales.These headwinds should dissipate in 2H.For e.g.assuming a similar“base”comp in 2H as in 1H for HD/LOW would support better trends.Seasonal a headwind in Q2 to-date,as is known,but compares ease in July;Our seasonal indicator is trending-14%QTD through June 29th,with weak trends in May,better in June largely due to compares.Most recent data showed a weak June exit rate,but compares ease materially,and using the two year stack QTD would point to a much stronger July.HD is lapping 200 bps of seasonal strength last year,LOW lapping 130 bps.Deflation(specifically lumber)slightly worse than Q1;Our commodity index points to deflation of 70 bps for HD vs.50 bps in Q1,slightly higher for LOW.Lumber prices are-36%QTD vs.-27%in Q1.However,prices have improved intra-quarter.Based on current levels,we expect modest deflation in Q3,slight inflation in Q4.It also would suggest a FY impact for HD of-22 bps vs.the 70 bps FY scenario it discussed in May when reporting first quarter results.Promotional analysis mixed,indicating slightly more activity from LOW y/y,similar for HD y/y:Analysis shows (1)higher email count for LOW in Q2,lower for HD.(2)Longer holiday sales periods for LOW,with Memorial Day lasting 22 days vs last years 14.Fourth of July savings also started earlier,on the 20th of June(for Appliances,28th for other categories)vs 28th of June last year.HDs Memorial Day period was the same length y/y.(3)Discount levels slightly higher for LOW vs.prior year,while HD has been similar Home price data still mixed:Our HD/LOW store level home price indices(population weighted)have continued to moderate,with a higher percent of listings with price cuts as well,and HDs markets slowing more than LOWs.That contrasts to national indices which have been stabilizing in recent months.For HD,data shows prices tracking an average of+2.3%QTD vs.+3.6%in Q1.For LOW prices are tracking an average of+2.5%QTD vs.+3.9%in Q1.15.4%of homes listed for sale in HD/LOW markets had price cuts,vs.13.6%a year ago,and 14.4%in Q1.Stock drivers key macro indicators favorable,particularly interest rates,should be supportive of current premium in relative valuation,but doesnt necessarily support more upside.LOW valuation is more compelling,but the catalyst for us is still less clear.Historically,HD has traded at a 21%premium to the market when rates have declined over 50 bps(vs current 18%),while LOW traded at a 16%premium(vs current 2%).7/10/2019 Initial Company Thoughts So Far in Q2 6 HD Q2 expecting relatively in-line EPS-focus on exit rate,and message on initiatives We currently expect a relatively in-line Q2,with in-line comps,lower GM but better SG&A with support from greater buybacks,and potentially the week shift adding more sales than reflected in consensus estimates.Exit rate will be key(July compares are easiest in Q1),along with the tone on initiatives which are expected to ramp meaningfully in 2H(see our comps bridge later).We model HD Q2 EPS$3.09,in line with consensus,with total comps+3.2%vs consensus+3.4%,US comps 3.5%vs.consensus 3.6%.Some items to monitor;HDs calendar shift should lead to sales growth 120 bps below comps,using 2013 as a case study.Consensus assumes a 160 bps gap,which may impact headline margins.That calendar impact should also lead to a positive impact to comps in that the comparison is slightly easier than it appears(e.g.Q1 comparison was actually 60 bps more difficult b/c of the shifted weeks,while Q2 is easier).Deflation was a 50 bps net impact in Q1.This could accelerate to 70 bps in Q2 before easing in 2H.Canada was a 30 bps headwind to total comps in Q1,which we expect to be 40 bps in Q2(offset by a slight FX benefit)based on more difficult compares,vs consensus which assumes minimal impact.HD is also lapping 100 bps of hurricane sales,which we expect to be a 60 bps headwind in Q2,and is lapping a 200 bps benefit from stronger seasonal sales.Share count could be more favorable than expected,as consensus assumes minimal incremental buybacks in the quarter($0.01-0.02).LOW Q2 some potential pressure vs consensus,but market seems aware of trends;Margins will remain a key focus in Q2 after the hiccup in Q1,although we would also be looking for signs of progress on the top line as we also saw in Q1.We model EPS at$1.99(vs consensus$2.01),on US comps of 1.9%(consensus 2.1%).Our total comp estimate of 1.6%and US comp of 1.9%embeds 30 bps of Canada headwinds,but no material FX impact.Consensus comps(1.9%total,2.1%US),seems to under account for Canada(we note Canada was 20 bps in Q1,and compares are more difficult).LOW should benefit from the fact that seasonal trends didnt fully recover for it last year(i.e.its comparison may not be as difficult).We also believe improved in-stock should be helping.Recall we had recently lowered our Q2 estimate to reflect similar GM trends as in Q1;we model GM-140 bps,vs consensus-92 bps.The Q1 pricing issue(90 bps)included 25 bps of tariff pressure,15 bps of promo pressure,and 50 bps of other pricing headwinds.We factor in a 75 bps impact,with supply chain another 40 bps impact as we saw last quarter,and some remaining mix impact(albeit less than the 35 bps last quarter,as LOW laps stronger seasonal sales last year which is lower margin).SG&A could be better than consensus(we model leverage of 67 bps vs consensus 40 bps).Payroll leverage should continue at the 80 bps Q1 run-rate,and advertising should remain a source of leverage,while lower comps may serve as a partial offset.7/10/2019 Leading Macro Indicator Moderated in Q2,as Expected;Suggests Reacceleration in 2H Lower rates,improving housing turnover and healthy consumer confidence are key variables for 2H,as shown below,estimates for comps seem to already embed that improvement 7 Source:BLS,BEA,Credit Suisse estimates,Company Data,NAR Forecasts,Thomson Reuters HD/LOW US Comps+Consensus Forecasts vs.CS Macro Leading Indicator Our macro indicator includes key Home Improvement demand drivers such as EHS,home prices,rates,and commodity prices.Growth moderated slightly in Q2 from Q1.Based on current forecasts for the aforementioned drivers,we would expect growth to reaccelerate in 2H,although below the prior run-rate,implying more support from company specific initiatives and market share will be needed.See our recent HD report here,discussing that.0%1%2%3%4%5%6%7%8%9%10%HD US Comps LTMLOW US Comps LTMLeading Indicator LTM7/10/2019 Short-Term Sales Data Points Still Relatively Lackluster,Due in Part to Comparisons Data through mid-June weaker,although expect stronger trends in the second half of Q2 8 HD US Comps vs SpendTrend Index Points to a 3.0%comp for Q2 QTD based on historical spread vs.consensus 3.6%and 3.0%last quarter,with the potential for the full quarter to shake out about in line based on a stronger July.For reference,SpendTrend+1.2%QTD through mid-June vs.1.9%in 1Q19.LOW US Comps vs.SpendTrend Points to US comps+1.5-3.5%QTD based on prior spread vs.consensus 2.1%,and 4.2%last quarter.Market share will be key,assuming last quarters outperformance vs market would support comps 3%,whereas market share similar to 2018 would point to 1.5%Source:Company data,Credit Suisse,SpendTrend Cons 2.1%0%2%4%6%8%10%12%14%2Q134Q132Q144Q142Q154Q152Q164Q162Q174Q172Q184Q182Q19LOW US CompsHome Improvement-SpendtrendR2=.52 Cons 3.6%0%2%4%6%8%10%12%14%2Q131Q144Q143Q152Q161Q174Q173Q182Q19HD US CompsHome Improvement-SpendtrendR2=.60 7/10/2019 Market Share in Focus Both HD/LOW Outpaced Industry in 4Q18/1Q19 Estimates for both HD and LOW imply outperformance vs.the industry again in Q2,marking the third consecutive quarter that both companies outperform;We believe that is reasonable 9 Source:Company data,Credit Suisse,SpendTrend 0%2%4%6%8%10%12%2Q134Q132Q144Q142Q154Q152Q164Q162Q174Q172Q184Q182Q19HD Comps vs.LOW Comps vs.Industry*