Market news and results from US DIY retailer Home Depot.
Market News
Equity markets are trading lower on concerns over China’s stuttering economy and signs the Federal Reserve will keep interest rates higher for longer to tame inflation. The decline registered in the US last night – S&P 500 (-1.2%); Nasdaq (-1.1%) – followed through into Asia this morning: Nikkei 225 (-1.5%); Hang Seng (-1.4%); Shanghai Composite (-0.6%). The FTSE 100 is currently trading 0.1% lower at 7,379.
The 10-year Treasury currently yields 4.18%. China’s holdings of Treasuries shrank to the lowest level since mid-2009 in June, falling by $11.3bn to $835.4bn. Gold trades at $1,906 an ounce.
Chinese shadow bank Zhongrong has no immediate plan to make clients whole after missing payments on dozens of products, an executive told investors. The trust firm’s liquidity challenges underscore troubles in the property sector, where new home prices dropped for a second month in July. The PBOC moved to boost sentiment with a stronger-than-expected yuan reference rate and the largest short-term cash injection since February.
The rate of UK inflation fell back to 6.8%, the lowest rate of change since February of last year, driven by lower gas and electricity prices. The figure was in line with market expectations and is something of a relief in light of the strong wage data released yesterday. However, core inflation remains stubbornly high, at 6.9% and the data adds to the case for the Bank of England to raise rates again. In response, Sterling ticked up to $1.2730 and €1.1650.
Brent Crude slipped to $84.30 a barrel. In the US, oil services company Enverus highlighted that the steep drop in American shale output is worse than expected, forcing drillers to work even harder to keep production from slipping. European gas prices have spiked 15% this morning on market jitters over LNG strike risk. Newcastle coal futures (a benchmark grade) went up to nearly $150 per tonne, the highest in almost three months driven by rising demand from China and rise in gas prices.
Source: Bloomberg
Company News
Yesterday afternoon, Home Depot released its fiscal Q2 results, reaffirmed its guidance for the full year, and announced a new $15bn share repurchase programme. Against a weak overall stock market backdrop, the shares were marked up by 1% during yesterday’s trading session.
Home Depot is the world’s largest home improvement retailer, with more than 2,300 stores across North America. The typical store today averages 104,000 square feet of indoor retail space, interconnected with an e-commerce business that offers more than one million products for the DIY customer, professional contractors, and the industry’s largest installation business for the Do-It-For-Me customer. The company generated revenue of more than $157bn in 2022 in what is a large and fragmented $950bn plus addressable market. It is viewed by many as the ‘best-in-class-operator.
Over the medium term, the company expects the overall home improvement market to grow by low-single digits, with Home Depot targeting sales growth of between 3% and 4% per year.
The group is focused on driving productivity in the business and is targetting $500m in annualised cost savings in 2024. Operating margin expansion is expected to be driven by a combination of sales leverage and productivity which will generate mid-to-high-single-digit diluted earnings-per-share growth.
In the three months ended 30 July 2023, net sales fell by 2.0% to $42.9bn, but was a touch above the market expectation of $42.2bn. On a comparable basis sales were also down 2.0%, albeit better than the 3.5% decline expected by the market.
While there was strength in smaller project-related categories like building materials, hardware, and plumbing, the group continues to see pressure in certain big-ticket, discretionary categories. Pro sales performance was slightly negative but outperformed the DIY customer. While surveys suggest that Pro backlogs are lower than they were a year ago, they are still healthy and elevated relative to historical norms. Additionally, projects in these backlogs are generally smaller in scale and scope.
Although foot traffic fell 5.1% in the quarter, it improved sequentially from the 8.6% fall in the previous quarter. The number of customer transactions was 459.1m, down 1.8% in comparable terms, with average ticket spend little changed at $90.07. Deflation from core commodity categories negatively impacted average ticket growth by 160 basis points, driven by deflation in lumber. Sales per square foot fell by 2.3% to more than $685.
Home Depot continues to expand its online presence, with 1% growth in online sales and almost 50% of US online orders were picked up in store.
Cost of sales fell by 1.9% to $28.8bn, to leave the gross margin down a touch at 33.0%. During this financial year, the group is investing an additional $1bn in annualised compensation for frontline, hourly staff. This is driving higher operating expenses (+4.1%) and this, combined with higher interest costs (+23.1%), pushed diluted EPS down by 7.9% to $4.65, albeit better than the consensus forecast of $4.44.
The group ended the quarter with adjusted net debt of $52.2bn, 1.9x cash earnings before operating rents calculated on a trailing 12-month basis. The company bought back $2bn of its shares in the quarter and has now authorised a new $15bn programme effective immediately, replacing its previous authorisation.
For the full year, the group still expects comparable sales to decline by between 2% and 5%, an operating margin of 14.0%-14.3%, and diluted EPS to fall by 7%-13%.
Source: Bloomberg