This HD print was right inline with our short thesis on the stock. Comps came in at the worst rate seen since the great recession at -4.5%, with the worst revenue miss in over two decades. The crux of our short view on HD is that given what has happened in housing demand, and the pressure on discretionary consumer spending, comps will significantly underperform expectations in 2023 and into 2024 with SG&A deleverage risk to further compress earnings. On a base case we have comps running down 6 to 8% over the next 12 months. The company has now revised down comps from flattish to -2% to -5%. This Q management was able to hit the headline EPS expectation by pulling SG&A levers (down 4% yy despite labor investments), but the downward earnings revision in guidance suggests it won’t have that lever in subsequent Quarters. Bulls will point to bad weather and the lumber drag (220bps) as core to the comp weakness, though management credited only 100bps of the comp decline to be from lumber prices, suggesting the team can tell there are other forces at play hurting demand. Management talked about DIY and Pro being down this Q, and that Pro is seeing customers shifting to smaller ticket projects with some pressure from credit/financing of those projects. Pro backlogs still exist but are shrinking, meaning there is further risk for comps to trend down toward underlying end demand. And ticket this Q was up just 0.2% vs +5.8% last Q, while the company is noting like-for-like SKU inflation is still being observed. So comps are down 4.5% and ticket flat while pricing hasn’t actually cracked yet... what if we get a moment of actual deflation given the consumer pressure and competitive intensity? Relevant PCE Category prices are still up ~20% from pre-pandemic, and after a period of significant over consumption, there remains significant unit consumption reversion risk. So factor in compressing backlogs, price/ticket risk, and continued consumption reversion, we think you have a high probability that comps are going to get worse from here. The demand destruction from the weak housing market of the last 12 months has not been fully recognized in home improvement comps. HD remains a Best Idea Short with downside to $160 to $200, though LOW is actually a higher conviction short here as we see similar comp risk with more gross margin risk at LOW. FND is also a short and the HD commentary around consumers shying away from big ticket projects is clearly bearish for FND. For details on how we get to our comp estimates across home improvement see our Home Retail Scenario Call Video Replay Link CLICK HERE.
