Jack Keough: Weather Fails To Dampen HD Supply's Outlook

HD Supply's big Q1 came despite losing 180 branch days due to weather, while the company's Construction & Industrial segment looks to stay hot. Meanwhile, CEO Joe DeAngelo isn't worried about Amazon Business.

HD Supply enjoyed a solid six percent sales increase in the first quarter despite being hampered by cold, snowy weather early in the year followed by catastrophic flooding in Texas, Oklahoma, and Arkansas.

Joe DeAngelo, chairman, CEO and president of HD Supply said that the company lost approximately 180 branch days due to full or partial closings in the quarter. In total, he estimated that HD Supply sales growth was adversely weather affected by approximately 100 basis points. The Waterworks group was most impacted because of ground conditions. Snow, below freezing temperatures, rain and mud are all not conducive to underground activity, he noted during a conference call with financial analysts.

HD Supply’s Facilities Maintenance group also had a critical distribution center closed in Texas during February.

“We did see significant impact from weather in Waterworks in the first quarter and into May, particularly in the Texas region where we had that catastrophic flooding. We do have strong backlogs in Texas and the surrounding regions,” said Evan Levitt, senior SVP and CFO, according to a transcript of the call as provided by seekingalpha.com.

Later, during a question and answer period, Levitt said it's difficult to determine how much of those lost sales will be recovered. “Once the weather normalizes, for instance, any sales – add-on sales we would get for somebody being in a branch, working on their normal shift, that sale is going to be lost,” he said. “However, some of the project works, the direct-ship work, we will recapture some of that as our customers are able to catch-up, but there's only so much they can work in a day. So, some of it will be caught up and some of it will be lost.”

But despite those headwinds and the drop off in oil and gas business, CEO DeAngelo is optimistic about 2015, particularly for the company’s in its construction and industrial segment (C&I).

C&I’s (White Cap) primary focus is the non-residential construction market, specifically 15 priority districts in high-growth cities. DeAngelo pointed to a number of major non-residential commercial projects such as stadiums, and corporate building activity taking place in those selected areas. “Those are the largest growing markets that we have and they're the ones where we have good presence and penetration. And our job is to be able to move our market share and aggregate from around 6 percent up north of 20 percent,” he said. “We’ve got plenty of room between those two points. So, it's whatever community development is required to be able to make those cities be better cities.” 

DeAngelo said the construction end markets continues to recover while the MRO market remains stable. Infrastructure markets continue to be sluggish but marginally better than last year, he said while residential is showing characteristics of more moderated extended recovery.

The company expects that residential construction will improve mid- to high-single-digits and that non-residential construction will improve to mid-single-digits.

DeAngelo also indicated he is not worried about Amazon Business coming into the marketplace.

“We spent our last board meeting, as a matter of fact, focused on information security and e-commerce and we're very confident that our plan of being able to digitally enhance our knowledgeable associates is a strong moat builder versus Amazon, which is pushing products,” he said, according to the transcript. “We haven't seen a buildup of products specific in our spaces relative to what has been over those past several years and we haven't seen an emerging threat relative to a knowledgeable associate being paired with a digital experience that will give you a better outcome for our customers.

“So, we feel very strongly that our digital investments are in the right spot and continue to distance themselves from Amazon or anybody else in the space.”

HD Supply expects its end market growth to be about y 3 percent or 4 percent for fiscal year 2015 which is consistent with its prior estimate in March.

This includes an estimated oil and gas headwind of approximately 50 basis points to 150 basis points, although the company currently has not yet seen a broad-based impact to its business. However, HD Supply has seen select weaknesses in its fusible pipes, its plastics initiative in Waterworks, select power solutions industrial-oriented customers in the central part of the country and certain branches in Western Canada.

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