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U.S. Hardlines Retail 8 February 2019Summary
We think Home Improvement trends decelerated in 4Q. Some macro indicators
such as turnover and home prices moderated during 4Q. At the same time,
commodities could be deflationary in 4Q as lumber and copper declined -24% and
-14%, respectively. The recent UBS Evidence Lab Macro-to-Micro (M2m) estimate
included a downwardly revised 4.5% comp for HD and 1.2% SSS for LOW.
However, the UBS vendor index highlighted that vendor sales growth accelerated
to 6.1% compared to 4.0% in 3Q. Vendor sales have historically had a 75%
correlation with HD & LOW SSS. Further, the recent UBS Evidence Lab Housing
Intentions surveys of 2k individuals have highlighted a 300-500 bp increase in the
percentage of owners planning on projects. Plus, they have signaled an intention
to spend 20-30% more on those projects. In terms of cadence, we believe the
period started off strong but probably tailed off a bit in January.
HD and LOW's forward multiples have moderated meaningfully over the past
several months as investors have increasingly been concerned about the state of
the housing cycle. In particular, HD and LOW are now trading at an average NTM
P/E of 17x, compared to 20x in Sep '18. We believe current multiples are already
pricing in slower trends in FY'19. As such, if there is any indication that top-line
growth can remain steady in the upcoming year, it could drive HD and LOW's
stocks higher.
In the table below, we present a snapshot of various home builders and products
companies who have recently reported. These companies have surprised positively
on sales by an average of 0.9%. Though, trends have varied meaningfully from
company to company.
Figure 3: Snapshot of Building Products / Home builders who recently reported
Source:Company Reports, Factset
Using UBS Evidence Lab data, an approach was developed that could help us
better understand how home improvement retailers have been performing. The
Macro-to-Micro Nowcasting methodology uses economic releases such as retail
sales, building permits, housing starts, and non-residential construction spending
as well as company level spending data in order to determine company specific SSS
estimates for the quarter. Historically, the revenue and comp estimates for HD and
LOW have been on the right side of consensus 75% to 95% of the time.
CompanyTickerRelease DateSales Beat/Miss% Sales Surprise% EPS Surprise% Post Release Price Change
Meritage Homes CorporationMTH01/30/2019Beat5.8%25.9%10.1%
Whirlpool CorporationWHR01/28/2019Miss-1.8%12.2%9.7%
Lennar Corporation Class ALEN01/09/2019Miss-0.3%25.4%7.9%
Masco CorporationMAS02/07/2019Beat1.7%13.9%6.8%
M.D.C. Holdings, Inc.MDC01/31/2019Beat6.2%-17.3%5.6%
PulteGroup, Inc.PHM01/29/2019Beat3.4%-23.9%0.8%
NVR, Inc.NVR01/25/2019Beat1.5%15.6%-0.2%
Caesarstone Ltd.CSTE02/06/2019Beat1.2%4.5%-0.3%
Fortune Brands Home & SecurityFBHS01/31/2019Miss-3.2%-7.8%-0.9%
Sherwin-Williams CompanySHW01/15/2019Miss-2.7%-14.4%-4.1%
KB HomeKBH01/09/2019Beat0.3%3.1%-4.5%
Beazer Homes USA, Inc.BZH02/05/2019Miss-1.1%-5.9%-5.4%
Stanley Black & Decker, Inc.SWK01/22/2019Beat0.5%0.4%-15.5%
Average0.9%2.4%0.8%
U.S. Hardlines Retail 8 February 2019For HD, the Nowcasting methodology estimates a 4.5% comp for 4Q'18, which is
in line with our estimate, and slightly below the consensus forecast of 4.6%. For
LOW, it estimates 1.2% same store sales growth, which is below our forecast of
1.5% and the consensus forecast of 2.1%.
Figure 4: M2m Nowcasting current view
Source:Bloomberg, Factset, UBS Research, UBS Evidence Lab
The weather was not very cooperative for outdoor projects in 4Q. November was
colder than usual for most of the country. Plus, extreme weather late in January
likely also acted as a drag on outdoor projects.
Figure 5: November 2018 Departure
from Normal Temperature
Figure 6: December 2018 Departure
from Normal Temperature
Figure 7: January 2019 Departure
from Normal Temperature
Source:High Plains Regional Climate CenterSource:High Plains Regional Climate CenterSource:High Plains Regional Climate Center
Commodity prices declined significantly in 4Q. This will probably act as a
drag on ticket growth. Specifically, lumber prices decreased -24% YoY on
average in 4Q, which compares to -1% decline in 3Q. Further, copper prices
decreased -14% on average in 4Q. This compares to a -10% decline during last
quarter. Over the past couple of quarters, commodity inflation represented a
significant contribution to average ticket. Given the recent decline in lumber and
copper prices, this is unlikely to be the case in 4Q.
SSSG Y/Y AccelerationY/Y Revenue SurpriseUBS Analyst
Release DateCompanyQuarterMetric
M2m
SSSG (Y/Y)
M2m Organic
Acceleration
(%)
M2m Organic
Acceleration (σ)*
M2m
Revenue
Growth (Y/Y)
Consensus
Revenue
Growth (Y/Y)
Revenue
Growth
(Y/Y)
Analyst
Rating
26 FebHD4Q18Y/Y Revenues11.2%11.4%(0.1)10.8%Buy
SSSG4.5%-0.2%(0.1)4.5%4.6%(0.0)4.5%
27 FebLOW4Q18Y/Y Revenues1.3%1.7%(0.3)1.0%Buy
SSSG1.2%-0.3%(0.1)1.2%2.1%(0.6)1.5%
* (M2m Acceleration)/Standard Error of M2m Acceleration** (M2m - Consensus)/Standard Error of M2m
M2m Revenue
Surprise (σ)**
U.S. Hardlines Retail 8 February 2019Figure 8: Lumber prices (YoY growth) vs. HD & LOW
average comps
Figure 9: Copper prices (YoY growth) vs. HD & LOW
average comps
Source:Bloomberg, NAHB, UBS, Company ReportsSource:Bloomberg, FactSet, UBS, Company Reports
Home Improvement vendors sales accelerated sequentially in 4Q. Most
vendors highlighted that the underlying state of the industry is solid. They believe
that despite a somewhat slowing US housing market and continued pressure from
factors such as cost inflation and tariffs, the overall industry demand should remain
strong. Masco noted that while it believes growth may moderate in 2019, the
fundamentals of its business in its core repair and remodel market remain healthy.
SWK reported strong organic growth in North America, driven by its innovation,
product rollout and price realization. Further, it expects some external headwinds
to persist in 2019, including commodity inflation, tariffs, and a slower US
residential housing market. FBHS noted that concerns over trade wars, interest
rates and the housing market itself had a clear impact on demand. Despite those
challenges, it said it saw progress and strength across its categories. SMG noted
US retailers are highly engaged and getting ready for the lawn and garden season.
Figure 10: Home Improvement vendor sales accelerated in 4Q
Source:Company Reports, UBS
The Housing Intentions survey (using UBS Evidence Lab data) highlighted that
fundamentals in home improvement industry continue to be strong and category
demand accelerated year-over-year. Specifically, the September 2018 survey
indicated solid trends in home improvement project intentions in 4Q'18 as 61% of
respondents expressed a willingness to do a project in the next three months (vs
56% last year). Further, the December 2018 survey implies that robust trends
should continue going forward as 59% of owners expected to undertake a
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
4Q'104Q'114Q'124Q'134Q'144Q'154Q'164Q'174Q'18E
Lumber Price (YoY)Average HD & LOW Comp
Lumber prices decreased -24% on average
during HD and LOW's'4Q'18
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
4Q'104Q'114Q'124Q'134Q'144Q'154Q'164Q'174Q'18E
Copper Price (YoY)Average HD & LOW Comp
Copper prices decreased -14% on average
during HD and LOW's'4Q'18
-4%
0%
4%
8%
12%
16%
20%
24%
4Q'124Q'134Q'144Q154Q164Q174Q'18E
HI Comps (avg HD & LOW)HI Vendor Sales (avg HD & LOW)
HI vendors reported a 6.1% sales increase
for the period corresponding to HD and
LOW's 4Q'18 vs 4.0% in 3Q'18.。。。。。。。。。