Distribution May 2021

Retail Sales Rise 9.8%
Retail sales unexpectedly rose 9.8% in March after falling a downwardly revised 2.7% in February, driven by stimulus checks that fattened bank accounts and vaccinations that made it easier for shoppers to get out of the house. Retail sales were up 27.7% year over year; despite occasional month-over-month declines, retail sales have grown year over year every month since June 2020. Sales increased across the board in every category except grocery; grocery stores were among the few retailers allowed to stay open at the beginning of the pandemic, so the category will be facing outsized comparisons for some time. Building materials and garden supply stores were up 12.1% after falling 3.0% in February and 32.4% seasonally adjusted from March 2020. Online sales, which are typically more weather-resistant, dropped by 5.4%. Core retail sales, which exclude automobiles, gasoline, building materials and food services, fell 3.5% after rising 6.0% in February. Core retail sales correspond most closely with the consumer spending component of GDP. The National Retail Federation (NRF) forecast that 2021 retail sales will rise between 6.5% and 8.2%, which would beat the previous record growth rate of 6.3% in 2004.

The Home Depot
JPMorgan Virtual Retail Roundup:

THD was represented by CFO Richard McPhail, who discussed the pandemic year of 2020 as well as THD’s future plans.

Before the pandemic, they would never have predicted they could successfully handle $21 billion in growth in one year; as spring progressed they found themselves dealing with comp sales growing more than 20% in a matter of days.
Their calculations show they've captured 275 basic points of market share over the past three years, which equates to about $10 billion in annualized incremental sales.

They believe they are the lowest cost provider in their space as well as the most capital-efficient company.

As homes became more valuable to consumers, they were willing to invest more in maintaining and updating them. The new focus on home combined with accelerating home sales has created the biggest housing shortage since post-World War II, with homes appreciating more than 10%. In 2011 the value of housing stock was about $11 trillion; today it’s about $31 trillion, and yet mortgage debt is relatively stable.

People took on more and more projects as the pandemic forced people to spend more time at home and figure out how home could incorporate school, office and play space. Successfully completing a project gave people the confidence to take on more and inspired them to keep improving.

They did not see any correlation between store sales and the state of the local economy. The only downturns they saw were in categories that were very Pro-heavy, because people did not want contractors coming into their homes.

As the country reopened, demand for Pro services accelerated; however, growth is being somewhat restrained by materials and labor shortages and the time it takes to pull permits and get inspections.

They manage to a very short cycle which is driven by short-term demand, with inventory turning six times a year.

Enabling car and van delivery in a majority of US markets allows them to promise same-day and next-day delivery from stores. During the height of the pandemic, delivery increased, but buy online, pick up in store (BOPIS) increased even more. Online sales driven by digital assets grew more than 80% last year and more than 60% of online orders were picked up in stores.

They really don’t know how 2021 will unfold, although they do acknowledge they will have easier comps with Pros this year. Pros tell them that their backlogs are very healthy.

They estimate the total market at $650 billion and growing, and feel that it basically does not matter where their growth comes from.

They deal in a lot of big, bulky products, and they are shooting for 90% same-day or next day delivery. They are also at 2-day parcel for more than 90% of the population.

Moving to flatbed delivery centers will allow them to cater to Pros’ needs; often it is not a matter of needing something immediately as much as needing it to arrive at the jobsite on a specific day within a specific time window. Many of the products they’re delivering are not stocked in the stores, such as longer-length lumber.

Their appliance business has lower margins than company average but delivers very high returns on investment. The business is very capital-light because they don’t actually “own” the appliances.

Other News:

Georgia Governor Brian Kemp vigorously defended THD after a group of political activists called for a nationwide boycott over THD’s position on Georgia’s controversial new election law. THD issued a statement after the bill was passed that “all elections should be fair, accessible and secure.” The bill’s opponents did not think the response was strong enough. Governor Kemp stated that THD did not initiate or support the bill and should not be unfairly targeted by opponents.

THD is suing their commercial general liability insurers, stating that they failed to cover tens of millions in costs related to a settlement of charges stemming from a massive data breach in 2014. THD stated that they had a combined $75 million in coverage that should have been used to cover the costs of replacing more than 36 million payment cards.

Compensation for THD’s top five executives jumped 43% for 2020. The big increases were due to THD’s outstanding growth of nearly 20% last year, which triggered non-equity incentive plan compensation. CEO Craig Menear got a 28.5% increase to nearly $14 million.

Lowe’s
Lowe’s is rolling out a number of initiatives and offerings​ nationwide directed at Pro customers. Lowe’s reports that the average Pro customer shops at Lowe’s 80 times a year, compared to four or five times for a DIY customer. CEO Marvin Ellison says that capturing more of the Pro market will help drive sales per square foot and profitability.

Upgrades include the Pro Zone, a dedicated area near the Pro entrance with products for grab-and-go conveniences as well as value packs of commonly used items. Lowe’s has also added Pro trailer parking, with extended spots to accommodate the oversized vehicles. They will offer phone charging stations at the Pro desk and a convenience rack of items that have not previously been sold, including pain relievers and personal care products such as sunscreen and hand care.

Lowe’s will also offer dedicated Pro checkout areas, staffed with salespeople, cashiers and employees to load goods. Pros can take advantage of flexible credit options that range from discounts to interest-free repayment options.

Finally, Lowe’s has implemented new technology designed to help Lowe’s associates improve relationships and better engage with Pro customers. Lowe’s says there will be additional offerings coming, including windshield cleaning stations, free air stations for inflating tires and portable air tanks for pneumatic tools.

Lowe’s acquired Stainmaster brand carpet and flooring; it will join their stable of private-label brands. The deal includes all brand-related intellectual property from Stainmaster’s parent company, Invista, as well as all related trademarks and sub-brands. Financial terms were not disclosed. Lowe’s has been the exclusive home improvement retailer for Stainmaster since 2010. Lowe’s said the acquisition fits into their Total Home strategy and will elevate their selection, as Stainmaster is the top brand in soft floor coverings.

Lowe’s is opening an appliance outlet store in Texas. They are converting a traditional Lowe’s store that closed two years ago. Lowe’s is now the largest retailer of home appliances, taking over the top spot from Sears. In recent years Lowe’s has opened a handful of outlet stores, but is planning to accelerate the pace this year. The stores are stocked with scratch-and-dent appliances and parts priced up to 70% off. Lowe’s had fiscal 2020 revenue of $89.6 billion and sold $12.1 billion worth of household appliances compared to The Home Depot, with fiscal 2020 revenue of $132.1 billion and appliance sales of $11.86 billion. THD has not opened separate stores for clearance items. Amazon competes in small appliances, but has only a limited selection of major appliances.

Lowe’s recently donated $1.5 million to UNC Charlotte in hopes of helping to build a technology talent pipeline, according to CIO Seemantini Godbole. She sees technology and innovation as critical to Lowe’s success. Seemantini will lead Lowe’s $153 million tech hub that was originally expected to open later this year but could be pushed back because of the impact the pandemic has had on construction schedules. The location will have as many as 2,000 tech employees at all levels and will be a hub for brainstorming and collaboration. Seemantini is very excited about doing joint research with graduate students, and has always felt that having an academic partner would be a real advantage.

Lowe’s executive compensation increased in fiscal 2020 as the pandemic gave sales a big boost. CEO Marvin Ellison saw his compensation nearly double to $23.1 million, thanks to incentive compensation of more than $5.8 million tied to performance goals.

Walmart
Walmart shoppers are more focused on price than US consumers overall, according to data analysis from selling platform JungleScout. Fifty-four percent of Walmart.com shoppers have experienced financial setbacks in the past year compared with 48% of US consumers overall. They scored higher on several related metrics, including becoming more conscious of spending money (82% of Walmart shoppers versus 73% of all consumers), looking for coupons, promotions and deals (83% compared to 75% overall), researching products before buying (78% versus 69%) and setting aside savings each month (50% versus 46%.) Overall, 73% of US shoppers made purchases on Amazon in the first quarter of 2021 compared to 40% who made purchases on Walmart.com. However, more than three-quarters of US consumers who shop online at Walmart are Amazon Prime members, with 60% of those making purchases on Amazon at least weekly. By contrast, just half of Walmart’s online shoppers are members of Walmart’s subscription service, Walmart+. Walmart customers noted they turned to Amazon when they needed specific brands (74%) and fast shipping (71%).

Walmart is aiming to reinvent the single-use plastic retail shopping bag through a partnerships with CVS and Target. Their goal is to identify, pilot and implement innovative alternative designs for the current single-use bag. The consortium, known as the Center for the Circular Economy at Closed Loop Partners, recently ran a contest called Beyond the Bag. They selected nine winning designs for a sustainable bag for the future and will work with the winners to test the designs.

Ace Hardware
Ace Hardware is turning to paid influencers to get the attention of millennials and Gen Z. Ace’s four influencers tackled home projects they had delayed by working with Ace and posting content to their TikTok and Instagram channels documenting their progress. Ace VP Marketing Jeff Gooding declined to give a specific budget but said that it was a fraction of what they spend on TV and the value is far beyond the budget. Experts say that working with influencers allows the brand to create content that does not feel like an ad. Reportedly, DIY influencers can be more costly than others because actually doing a project is much more work than just creating a post.

Amazon
Q1 revenue rose 44% to $108.5 billion and first-quarter profits more than tripled as Amazon benefitted from the pandemic boom in online shopping. Excluding the $2.1 billion favorable impact from year-over-year changes in foreign exchange rates throughout the quarter, net sales increased 41% compared with first quarter 2020. Results were well above analysts’ expectations.

Amazon Web Services (AWS) revenue grew 32% to $13.5 billion on greater demand for cloud computing.

Amazon revealed there are now more than 200 million paid Amazon Prime members worldwide. They also stated that Prime Day will take place later in the second quarter. Introduced in 2015, Prime Day was always held in July until the pandemic forced it to be postponed until October. Amazon stated that June makes more sense as with travel restrictions easing many families may be traveling in July.

Net sales for the second quarter are expected to grow between 24% and 30% compared with second quarter 2020.

Amazon warehouse workers in Alabama voted overwhelmingly against forming a union, with 1,798 workers voting no and 738 voting yes. Both sides aggressively campaigned for several months. It was the biggest union push in Amazon’s 26-year history and only the second time an organizing effort within the company has come to a vote. Both the union and Amazon peppered workers with messages inside the warehouse and through the media.

Amazon’s share of US digital advertising rose from 7.8% in 2019 to 10.3% in 2020, according to the latest eMarketer report. Google (28.9%) and Facebook (22.5%) still lead the race, but Amazon is expected to continue to gain share of this growing market, with their share rising to 12.8% by 2023. Most likely some shopper marketing budget dollars have been shifted from traditional vehicles to digital vehicles. Projections call for Amazon’s search ad revenue to grow to $14.53 billion this year, or 19% of total US search ad spending, up from $13.35 billion in 2019.

Amazon is teaming up with MIT to add driver intuition to the machine learning (ML) models used for optimizing delivery routes. Amazon’s Last Mile team, which develops planning software for the delivery fleet, is collaborating with MIT to incorporate driver know-how into route-optimization models so that the ML models can predict the delivery routes that are chosen by experienced drivers. Amazon and MIT are sponsoring a competition called the Amazon Last Mile Routing Research Challenge to see which academic teams can best teach the ML models how to predict the routes used by experienced drivers. The winners’ prizes are $100,000 for first place, $50,000 for second and $25,000 for third, and Amazon may invite top-performing teams to join the Last Mile team. Top performers may also be invited to present their work at MIT.

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