Business remained steady for both of its business units during the quarter as revenue for its Facilities Maintenance segment increased 7% while revenue was up 8% for its Construction & Industrial segment.
Click here to access its earnings press release.
Despite facing disruptive weather, particularly in its west coast markets, HDS was able to deliver the solid results through a mix of cost management, some price increases, and share repurchases.
Unfortunately, the unfavorable weather reared its head again in May.
Its yr/yr average daily sales for the month increased a scant 0.2% with its Facilities Maintenance segment experiencing a 2.8% drop.
The sluggish results in May caused the company to cut its FY19 guidance. Originally, HDS guided for EPS and revenue of $3.52-$3.81 and $6.30-$6.45 bln, respectively. Now, the company expects to generate EPS of $3.52-$3.70 on revenue of $6.25-$6.35 bln.
HVAC services is a significant contributor in its Facilities Maintenance segment. The unusually cool and wet weather this spring caused customers to push back HVAC-related orders.
This time, bad weather is being compounded by a variety of other issues that negatively impacted business in May.
HDS is still trying to catch up on delayed work from February, but a shortage of skilled labor is keeping it from completing some jobs in a timely manner.
Another factor is that the residential construction market is under-performing its expectations as the housing market on the west coast slows. The residential construction market accounts for about 25% of HDS' Construction and Industrial business.
The weather and housing market are factors that are out of the company's control. However, HDS also has had some problems regarding is brand new distribution center in Atlanta. The company experienced vendor system issues creating delays in the fulfillment of customer orders, resulting in a 300-400 bps reduction in May sales.
Last, HDS does have considerable exposure to the China tariffs. About 75% of its Facilities Maintenance brands are sourced from China with around 50% of those products included in the Section 301 tariffs.
During the earnings call this morning, its CEO commented that it has yet to see a meaningful impact from tariffs since it takes some time for cost increases to work through the supply chain. The company has also managed to offset the higher costs through vendor negotiations and improved productivity.
Overall, HDS believes the elevated tariff environment is manageable, but it believes that maintaining gross margin rates steady over the year may be difficult.
Key Takeaways: HDS did an admirable job of navigating through unfavorable weather and higher tariffs in Q1 to deliver a solid quarterly report.
As the quarter progressed, conditions only became more challenging as unfavorable weather persisted and vendor system issues at a key distribution center compounded the problem.
Adding fuel to the fire is a sluggish residential housing market, skilled labor shortages, and escalating tariffs.