Home Depot sees opportunity in tool rental
By: Tonya Garcia
Home Depot Inc. has seen its tool rental business soar with professionals in recent years, but executives say there’s still room for further growth.
“We know 90% of pros rent tools, but several years ago, only about one out of 10 pros rented from us,” Craig Menear, Home Depot’s HD, -0.02% chief executive, said on the earnings call, according to a FactSet transcript. “Today, that number has improved to one out of four, yet there remains opportunity for further growth as we continue to invest in our tool rental experience.”
Home Depot said it has “the largest number of tool rental centers in North America” with about 1,100 locations in its stores.
Home Depot joins a number of companies that see revenue streams in rental.
In the apparel sector, Rent the Runway has become the best-known name in the rental game, and has reached a value of $1 billion as a result, according to The Wall Street Journal. Urban Outfitters Inc. URBN, -0.53% , American Eagle Outfitters Inc. AEO, -0.11% and other companies are also jumping in.
Home Depot’s optimism in this and other areas of the business is shared by analysts. The home improvement retailer reported earnings that beat expectations and revenue that was roughly in-line with expectations. U.S. same-store sales, however, fell short at 3% growth versus the FactSet estimate for a 4.2% climb.
“Understandably, the F1Q19 comparable sales miss is worrisome given the recent choppiness in the housing data and concerns over the length of the U.S. economic cycle,” wrote Raymond James analysts led by Budd Bugatch. “Nonetheless, given the weather-related impacts across the country in F1Q19 (specifically February), we concluded there was some temporary noise in the results that masked stronger underlying demand.”
On the call, Menear said this past February “was the second wettest on record for the U.S.” Planalytics, a group that monitors the business impact of weather, said temperatures became colder as the month progressed, with snow and rain “prominent” in the western and central parts of the country.
“The DIY/Home Center sector benefited from a favorable March and April to see an overall weather boost for the quarter of $791 million compared to the first quarter of 2018,” Planalytics said in a report.
Raymond James rates Home Depot shares outperform with a $205 target price.
Menear also discussed problems with lumber.
“[L]umber prices continued to decline in the quarter, resulting in a negative impact to sales growth of approximately $200 million,” he said.
Stifel analysts say lumber deflation could have an $800 million impact on the year “if prices don’t rebound as they normally do in the spring.”
Nonetheless, analysts have confidence in Home Depot’s ability to put operational improvements in place and deliver “strong” revenue growth.
Stifel rates Home Depot buy with a $210 price target, up from $200.
“We believe Home Depot remains one of the best long-term stories in retail given company-specific sales and margin initiatives, the duopoly/Amazon-resistant nature of the industry, and significant financial and operating leverage that amplifies EPS growth in better sales environments,” wrote JPMorgan analysts.
They maintain their overweight stock rating and moved their price target up $1 to $204.
Home Depot stock is up 10% for the year to date, roughly in line with the Dow Jones Industrial Average DJIA, -1.11% , which has gained 10.5% for the period.