We’ve been bearish on the Home Improvement space for about a year now. The crux of our call is that crashing home turnover and reversion off of elevated levels of home consumption means persistent comp pressure across the space for much longer than consensus expects. FND was macro unaware at the start of the year around the troublesome 2023 demand landscape, but now they are clearly waking up to the risks. This was the third guide down of the year, and a big one given only 4Q is remaining. The company specifically highlighted the pressure of reduced home turnover, trade down, and smaller projects being a drag on comp pressure. Average ticket went negative for the first time since 2020. And the company talked about the clear risk of negative comps in 2024 given the current trends and despite the store maturity comp help. Management even took down 2024 store targets (from 35+ to 30-35) around being more prudent on capital deployment in this time of depressed demand. Changing the store cadence is the last thing the bulls wanted to see. Earnings for the year were cut to a level below our original base case for the short, and 2023 estimates have fallen from $3.40 to now ~$2.20, though the short really only started working in the last three months when demand slowed again, with the October read from management being crashing comps. FND is a name we’d want to own at some point, the earnings juice on an eventual consumer/home retail recovery is immense given the store growth, but expectations have simply remained far too high (with a massive multiple), keeping it on our Best Ideas Short list. Our updated numbers below suggest there is still 20% downside risk, but if the consensus expectations and stock fall enough in the coming days, this could find its way off our conviction short list. We think the demand elements discussed by FND are a risk to comps for LOW and HD as well over the next few quarters. See Valuation and SIGMA Analysis below.
For the replay of our update call on the home improvement demand risk and scenario analysis, see our Home Improvement Deep Dive Video Replay and Slide Deck Link CLICK HERE
