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Stock Analyst Update

HD Supply Tops Estimates, Raises Guidance

We're maintaining our fair value estimate on the narrow-moat industrial distributor.


 HD Supply (HDS) reported strong fiscal first-quarter results on June 5 that beat management's guidance as well as consensus estimates. The narrow-moat industrial distributor's revenue increased 14% (10% organic) year over year to $1.4 billion, adjusted EBITDA grew 21% to $190 million, adjusted EBITDA margin expanded 80 basis points to 13.7%, and adjusted diluted earnings per share increased $0.31 versus the year-ago quarter to $0.70. Management raised its guidance for full-year revenue, adjusted EBITDA, and adjusted diluted EPS. We're maintaining our $45 fair value estimate.

HD Supply completed its acquisition of A.H. Harris in early March, and the newly acquired business contributed $53 million of sales to the construction and industrial business during the first quarter. C&I sales grew 24% year over year including A.H. Harris and 14% excluding it. The facilities maintenance segment increased first-quarter sales 6% versus the year-ago quarter.

While we believe HD Supply's facilities maintenance segment is more exposed to rivalry from online competitors than the company's C&I segment, we're not seeing any material signs of atypical price competition. Indeed, the facilities maintenance segment's first-quarter gross margin expanded 110 basis points year over year. While part of that expansion was due to slower-than-usual sales of lower-margin heating, ventilation, and air conditioning products due to cooler weather conditions, management believes the segment can produce gross margins that are flat to up 20 basis points through the remainder of fiscal 2018. The facilities maintenance adjusted EBITDA margin expanded 120 basis points to 17%.

The C&I adjusted EBITDA margin expanded 100 basis points to 10.1% as fixed-cost leverage more than offset a 90-basis-point decrease in the segment's gross margin, which was driven by A.H. Harris' unfavorable mix, lower rebar margins, and increased contribution from larger projects with lower margins.

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Brian Bernard does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.