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JP 摩根-美股-零售业-美国零售业预览:不要与美联储作对-220-25页.pdf
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JP 摩根-美股-零售业-美国零售业预览:不要与美联储作对-220-25页.pdf
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www.jpmorganmarkets.com
North America Equity Research
20 February 2019
Equity Ratings and Price Targets
Mkt Cap
Rating
Price Target
Company
Ticker
($ mn)
Price ($)
Cur
Prev
Cur
End
Date
Prev
End
Date
The Home Depot
HD US
219,448.50
192.33
OW
n/c
203.00
Dec
-
19
n/c
n/c
Lowe's
Companies, Inc.
LOW US
84,783.42
105.06
N
n/c
104.00
Dec
-
19
n/c
n/c
Floor & Decor
FND US
3,448.69
34.98
N
n/c
30.00
Dec
-
19
n/c
n/c
Source: Company data, Bloomberg, J.P. Morgan estimates. n/c = no change. All prices as of 19 Feb 19.
Broadlines & Hardlines Retailing
HD/LOW/FND Preview: #Don'tFightTheFed; But What
Now
Retailing/Broadlines & Hardlines
Christopher Horvers, CFA
AC
(1-212) 622-1316
christopher.horvers@jpmorgan.com
Bloomberg JPMA HORVERS <GO>
Tori K Bertschy
(1-212) 622-0826
tori.bertschy@jpmorgan.com
Tami Zakaria, CFA
(1-212) 622-9888
tami.zakaria@jpmchase.com
C. Jerry Sullivan
(1-212) 622-5928
jerry.sullivan@jpmorgan.com
J.P. Morgan Securities LLC
See page 20 for analyst certification and important disclosures.
J.P. Morgan 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 rep
ort as only a single
factor in making their investment decision.
#Don’tFightTheFed but what now. Not shortly after our HD headquarters visit,
the Fed put rate increases on hold (and more recently dialed back its balance sheet
reduction). In lock step, HD, LOW and FND have bounced significantly. Given
the importance of rates to housing, this policy change certainly cannot be
dismissed. Indeed, mortgage rates are 50 bps off highs, which could lead to
housing turnover and pricing better than previously feared and let the category
grow longer (the NAHB has already bounced). Plus, both HD and LOW face a
very easy 1Q compare (making it easier for near term investors to dream the
dream—most likely more a benefit to LOW given the turnaround narrative). On
FND, we lap peak hurricane headwinds in 4Q.
The overhang to watch is that industry growth is indeed moderating (along
with the consumer) and while 2019 consensus estimates may prove ok, 2020
and 2021 assume trends persist (~4.5%, ~3.0%, and 7.0%, respectively, for HD,
LOW, and FND in both years). Indeed, while weather and inflation were likely
headwinds in 4Q, we believe trends were more volatile than in recent years with a
potential December swoon and strength to finish the quarter for HD and LOW.
Net-net, there is less risk on the 2019 outlook after the Fed but it would be nice for
out-year sales estimates to come down to more beatable levels.
Specific to earnings, we find a lack of buyside consensus on 4Q comps for HD
and LOW with some expecting misses and some in-line (the Census report is
closely monitored for this category and the December release last week is being
questioned while January has yet to be released). On 2019 guidance, we expect
LOW to maintain its forecast from its Analyst Day but it is likely backhalf-
weighted given the timing of topline initiatives. Moreover, we believe the Street is
a touch high on HD’s EPS (flat EBIT vs. +10 bps consensus) and more so on FND
(perhaps $1.05 at the midpoint vs. $1.13 consensus).
Gauging the market growth rate for 2019: ~3.5%. As discussed in our recent
Housing Monitor, and summarized in Figure 1, the most highly correlated
forward indicators to HD, LOW, and FND comps (GDP, home prices, turnover)
along with key commodity deflation and hurricane laps suggest a slower comp
trend in 2019. This also jives with flattening share of wallet/PFRI and slowing
category sales since 2017 (and expected moderating retail sales growth overall
in 2019). Indeed, as noted in the last bullet, key vendors broadly spoke to a 100-
200-bp repair and remodel market slowdown to ~3-4%. Taken together, we
believe this biases HD’s 2019 comps in-line with the current 4.5% consensus
with LOW potentially at risk vs. the 3.2% consensus. This assumes share gains
2
North America
Equity Research
20 February 2019
Christopher Horvers, CFA
(1-212) 622-1316
christopher.horvers@jpmorgan.com
for HD (~100 bps, similar to trend) and modest share losses for LOW (-70 bps,
which represents improvement vs. -200e in 2018). On FND, we remain below
the Street in 2019 at 5.4% vs. the 7.1% consensus.
HD: 4Q consensus comp and 2019 guide look a little high but we believe
this is mostly expected. Recall in January, we tweaked lower our 4Q comp
outlook based on SHW's commentary and weather volatility in the quarter
(November and December precipitation +65% and +117% YOY, respectively).
In our view, the current 4Q consensus of 4.9% is likely to prove a little high
though EPS seems less at risk. As it relates to 2019, as discussed in our
management meeting note last month, we believe FY19 comps will be guided at
the low end of HD’s 4.5-6.0% SSS three-year algo discussed at HD’s 2017
Analyst Day with housing more moderate and HD lapping more than 100 bps
each of inflation and hurricane lift in the first half (see Figure 3). Thus, we see
the Street's 4.5% 2019 SSS forecast as reasonable. On the margin front, we are
forecasting a flat EBIT margin in 2019 from better SG&A productivity efforts
(e.g., new labor model) but more GM headwinds from freight and supply chain
pressures. As such, we are 2% below FY19 consensus of $10.27 (which is
predicated on 10 bps of operating margin expansion). Recall, HD’s guidance
only assumes share repurchases from cash flow (and not incremental leverage),
which suggests an EPS guide of ~$9.95 as the Street assumes higher
repurchases. Net-net, we believe the 4Q comp could prove mildly disappointing
given varying views of performance (driven by the lack of buyside consensus
discussed above) and the run in the stock. That said, we believe our guidance
views are largely expected based on our conversations. Lastly, despite the Fed,
hedge fund sentiment on HD remains biased negative given valuation and lack
of perceived upside to 2019 numbers. HD reports Tuesday 2/26 at 6AM with a
CC at 9AM.
LOW: lowering 4Q comp and EPS estimate; 2019 guide maintained but
likely back-half weighted. Given a tough December comparison, a more
volatile consumer this holiday, and SHW’s commentary, we are lowering our
4Q comp estimate to 1.7% (2.1% US) vs. consensus of 2.3% (similar to what we
did for HD in January; we believe 2H January improved for both). As a result,
our updated 4Q EPS estimate is $0.77, in-line with consensus that recently
ticked down $0.01. As for guidance, we expect LOW to maintain the FY19
guidance introduced at its Analyst Day in December including ~3% same-store
sales (consensus 3.3%) and adjusted EPS of $6.00-6.10 (Street $6.04).
Operating margin is expected to leverage ~100 bps on an operating basis (30 bps
ex-“one timers” from 2018) with the underlying improvement from sales
leverage, better store productivity, tighter SG&A control, and lower advertising
costs. Aside from an easy weather comparison in 1Q, we expect the guide to be
back-half weighted given similar weather and inflation laps (see Figure 3)
described above for HD and the timing of LOW’s initiatives. From a sentiment
perspective, we believe there is a core group of investors that remains optimistic
on the turnaround with faster money players reflexive with the market. With the
market buoyancy, this latter group is starting to look at the easy 1Q comparison
as a potential positive catalyst and bridge to later in the year. As we've noted,
we like the management team (and walked away from the analyst day
impressed) but our view since Marvin has joined has stayed consistent:
improvement will take time especially because of the supply chain and IT
deficiencies and coupled with a slowing environment makes it more challenging
3
North America
Equity Research
20 February 2019
Christopher Horvers, CFA
(1-212) 622-1316
christopher.horvers@jpmorgan.com
to execute that turnaround as the tide recedes. LOW reports the day after HD
on Wednesday 2/27 at 6AM with a CC at 9AM.
FND: 2019 guide likely below the Street. Unlike last year, FND did not pre-
announce at ICR in early January and our conversations suggest the buyside is
not expecting a miss. We do see conservatism in the 4Q comp guide as earlier
in the year management was expecting L-MSD comps for this quarter and the
implied dollar headwind from lapping the hurricanes is materially more than
the implied dollar lift a year ago (some of which is explained by a Houston-area
store entering the comp base in early 2018). In terms of the guide, we are
modeling 2019 comps of 5.4%, below the 7.1% consensus, though management
was clear at ICR that they will guide to M-HSD SSS (with the hurricane lap
making for better trends in 2H). From an earnings standpoint, we see potential
downside risk on the margin line; we are currently forecasting FY19 EPS of
$1.10, below the Street’s $1.13, with our estimate perhaps the high end of the
guide. FND might also assume 25% tariffs, which we estimate could be an
incremental $0.03-$0.05 headwind, mainly in the backhalf. Note, FND is
holding a sell-side meeting on 2/28 (one week after it reports earnings). FND
reports 4Q18 earnings on Thursday, February 21 at ~6:50AM ET, followed by a
conference call at 9AM.
Key vendors indicate a ~100-200-bp market slowdown in 2019. By
company: MAS is expecting a 3-5% sales growth outlook in 2019 with
repair/remodel demand +MSD (slower than 2018) and residential construction
+LSD with Plumbing expected to be slightly worse YOY but Cabinets and
Decorative largely similar. In Decorative, Pro is expected to be +HSD, which is
consistent with 2018's performance and represents share. SHW is expecting
+LSD growth for the Consumer business overall in 2019 (vs. the company
claiming +MSD growth in 2018). LOW accounts for 40% of SHW's Consumer
Brands Group sales. MHK guided 1Q19 below the Street from the economy
slowing in most markets, housing under pressure in some regions, lower
production rates due to the softer environment, and higher priced materials
flowing through (in order). FBHS is expecting the repair and remodel market to
grow 3-4% vs. +5% in previous years. For SWK, by segment Tools & Storage
organic sales are expected to grow 4-6% (consistent with FY18’s outlook),
Industrial organic sales roughly flat (vs. –LSD guide in FY18), and Security
organic sales +LSD (consistent with FY18's outlook). Part of the lowered
operating EPS guidance was driven by a softer organic sales growth outlook to
4% (from 5%) driven by a more conservative outlook for automotive
production, a moderating US housing market and deceleration in International.
WHR is expecting NA industry growth of 0-1% in 2019 vs. 1-2% in 2018
(originally guided 2-3%) “against a housing market which is right now still
moving sideways.” SMG is expecting 1H19 to have Consumer sales $100MM
higher than 1H18 as a base case from a sales timing forecast as 2018 was
difficult early weather year being cold and wet. Lastly, the JCHS leading
indicator of remodeling activity’s release in January indicated a significant
slowdown by 4Q19 to 5.1% vs. 7.5% in 2018.
4
North America
Equity Research
20 February 2019
Christopher Horvers, CFA
(1-212) 622-1316
christopher.horvers@jpmorgan.com
HD by the numbers. We are forecasting 4Q18 comps of 4.0% (4.2% US comp)
with EPS of $2.14 vs. consensus of 4.9% and $2.16, respectively. We are
expecting gross margin deleverage primarily from freight costs and slight SG&A
deleverage from investments partially offset by payroll.
LOW by the numbers. We are forecasting 4Q18 comps of 1.7% (2.1% US
comp) with EPS of $0.77 vs. consensus of 2.2% and $0.77, respectively. We are
expecting gross margin deleverage primarily from freight costs and SG&A
deleverage from payroll and investments.
FND by the numbers: We are modeling 4Q18 comp of 1% and EPS of $0.17 vs.
consensus of 1.4% and $0.18, respectively. We expect ~70 bps of gross margin
deleverage from shrink, higher freight costs, and less favorable mix slightly
below consensus. We are modeling 180 bps of deleverage from SG&A as % of
sales from higher selling and store operating costs, better G&A, and higher
preopening expenses.
Figure 1: Home Improvement Outlook
Source: Bloomberg, U.S. Census Bureau, DLX, JCHS, J.P. Morgan estimates.
2019e 2018 2017 2016 2015 Comments
LIRA 6.7 7.2 6.3 5.4 NM -50 bps
Share of Wallet 8.1 8.1 8.3 8.0 7.8 Growth=core retail sales g = wage g
EHS turnov er (1.0) (2.7) 1.8 4.5 Current implies -1% 2019; -4% 1Q, -3% 1H
Pricing - 5.1 5.5 5.5 5.5 Flat 2019 implied with 2Q potentially dow n
Core Retail Sales 4.0 5.1 4.4 3.7 5.1 2019=w age grow th
Wage and salary 4.0 4.4 4.6 2.9 5.1
HI Sales 3.0 3.8 8.2 5.4 Grow ing 3.4% since July ; 2 yr implies 2.4%; 2.1% 1H, 2.8% 2H;
PFRI 3.9 3.9 3.9 3.7 3.5 Implies grow th = nominal GDP
Inflation - 0.7
HD US Comp 4.5 5.6 6.9 6.2 5.6
LOW US Comp 2.5 2.6 4.1 4.2 4.8
HD consensus 4.5
LOW consensus 3.2
HD vs. consensus 0 Assumes ~100 bps of share gain
LOW vs. consensus -0.7 Assumes ~70 bps of share loss vs. 200-300 recently
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