Why coronavirus may not hammer Home Depot like other big retailers
Being a retailer that champions American-based suppliers is always a great thing, but especially when a catastrophic situation such as the coronavirus erupts in China — otherwise known as the de-facto supplier base for most of the world’s largest retailers.
Home improvement giant Home Depot (HD) stands to navigate the coronavirus somewhat successfully — at least until the middle of the year — in large part because 70% of its inventory is sourced domestically. The rest of Home Depot’s merchandise is sourced from Mexico, Canada, India, Southeast Asia and Europe.
For some perspective, the long-running number bandied about on Wall Street for Walmart had about 70% of its products being sourced from China. More than 50% of Nike’s apparel and footwear is made in China through the use of contract manufacturers.
What this means for Home Depot is twofold.
First, it may not see the out of stocks in key products similar to a Walmart or a Dollar Tree (though Walmart’s CFO Brett Biggs downplayed that prospect in a recent interview with Yahoo Finance), those retailers overly rely on China for inventory. Secondarily, Home Depot’s costs probably won’t get out of whack like other retailers now being forced to speed up most shipments or find production at a higher cost in another emerging market.
That’s not to say Home Depot is completely immune — a good number of power tools and hardware is made in China. But if investors are looking to scoop up weakened retail stocks being slaughtered on coronavirus disruption, its names such as Home Depot, with minimal exposure to China, that should be considered first.
“We feel really good with respect to where we stand with product for the first quarter,” new Home Depot CFO Richard MacPhail told Yahoo Finance in an interview post earnings on Tuesday. “Beyond that, we are working on a supplier by supplier basis and a container by container basis to understand the situation and manage it the best we can.”
Home Depot CEO Craig Menear told analysts on a conference call he doesn’t expect an earnings hit over the next couple quarters based on supply chain disruptions out of Asia.
Others in retail wish they were so lucky.
Taking a wallop
Macy’s CEO Jeff Gennette warned investors on his earnings call Tuesday to brace for a coronavirus profit hit this year (which is not factored into the company’s full-year guidance). Macy’s is poised to be walloped in two ways.
One, sharply lower sales by tourists at its important flagship stores in the U.S. such as Herald Square in New York City. And two, important suppliers like Nike may jack up prices to Macy’s to offset their higher costs of production. That is if Nike could get Macy’s certain products to prevent empty shelves.
“We have about 70 stores that have a strong Asian customer base, so that’s either local, like a store like Flushing or tourist based which would be a store like Union Square. And we've seen some slowdown of sales in these stores this month, nothing to be concerned about yet. But we believe that this - you know, that this is unfolding, so we will see how that goes,” Gennette said.
Gennette added, “And then the third bucket is really the product piece, which is what's going on with our supply chain. We expect a slowdown. We have seen a slowdown, a product that's flowing out of China, nothing concerning yet. And we're watching this one very, very carefully.”
The comments shouldn’t come as a shocker to investors if they haven’t been asleep at the switch.
Ralph Lauren — which heavily relies on China for sourcing and to sell merchandise in branded stores — said a week ago sales in its fourth fiscal quarter would be hit by $55 million to $70 million due to the coronavirus outbreak. Lululemon said a few days ago it has closed all 38 of its stores in China — it will provide guidance on the financial hit when it announces earnings in March.
Somehow we think it will be brutal.
Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Watch The First Trade each day here at 9:00 a.m. ET or on Verizon FIOS channel 604. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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