We’re reiterating our Short on HD even with the selloff on this print. The company printed a slight EPS beat, but with a negative comp. That’s the first negative comp in about 12 years. As a reminder, HD in the last housing downturn comped down 14 quarters straight. Yet the company is guiding to flat comps for 2023. It is also guiding to EPS down MSD%, while street was expecting flat. Operating margins to be down to ~14.5% (despite the freight tailwind) as SG&A investment will cause deleverage. Props to the company for investing in labor, as it should be, but this is a margin risk given our industry outlook.
On the call the company outlined out its industry outlook, which included flat economic growth and consumer spending. That translated into the home improvement category down LSD, while HD expects to gain share, hence the 0% comps. We think the industry outlook the company has laid out is a near best case scenario. We detailed out our different home retail scenarios in a presentation last week. The scenario summary and our HD financial is below, as well as a link to the video replay and slide deck. We think a more likely home improvement category performance is in the area of down 7%, leading to comps for HD around negative MSD%. Piecing together the other commentary around outlook, would result in a margin of ~13.5%, which is right around where our model is coming out.
Punchline is we think that comps miss, and therefore SG&A deleverages even more. Earnings to be 10% or more below where the street settles out, and the multiple to come down as well. HD is a Best Idea Short with downside to $160 to $200. LOW and FND are also Best Idea shorts similar industry setup though those have even more earnings leverage to the downside.
Home Retail Scenario Call Video Replay Link CLICK HERE
