Some Thoughts on HD’s Q2 Results

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With retail earnings dominating the morning’s news flow, we thought we would offer some (brief) commentary on Home Depot’s (HD) Q2 results.
There is no quibbling about the comp – +10.7%, a full 400 bps above consensus with the U.S. comp at 11.4%.
Where there will be quibbling is on slightly weaker than expected gross margin performance as well as a distinct lack of SG&A leverage on what was, again, a stellar comp performance.   While EPS of $1.24 was better than consensus ($1.21), we suspect that investors will be wondering where the EBIT went in the quarter.  Incentive comp and a focus on customer service apparently have a price.
Additionally, there may be some questions on guidance (+$0.08 to $3.60 from $3.52) – consensus was at $3.63 as of last night.
Lots of trees, let’s look at the forest, which we continue to believe is a sustainable, positive trend in housing starts and home prices, both significant contributing factors to the outsized comp performance we saw at HD this morning.

Exhibit 1:  NAHB Housing Index

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For reference, we wanted to include our chart of the recent reading of the NAHB Housing Index (Exhibit 1) as well as the long-term relationship between the NAHB index and single family home starts (since 1985, Exhibit 2).  Over time, the relationship has been very tight, and if that relationship continues, we can expect to see continued, positive trends in housing starts, consistent with our view.
In conclusion, we continue to think that the recovery in the housing market is well-begun and sustainable, to the benefit of equities with leverage to the housing sector – LOW and HD in our universe, though we can expand that list to include BBBY.  We note that WSM is scheduled to report EPS on the 28th and we are going to take this opportunity to remove it from our “preferred” list given that we are less comfortable with that print than either LOW or HD.
We continue to see several sources of pent-up demand for housing (lower stay at home rates, higher movement rates) and, importantly, we see the housing market closer to equilibrium in terms of price and homeownership rates than it has been at any point in the past 5 years.

 

Exhibit 2:  NAHB Housing Index and Single-Family Home Starts

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