Distribution July 2021

Retail Sales Fall 1.3%
Retail sales fell 1.3% in May after rising an upwardly revised 0.9% in April. Retail sales were up 28% from May 2020 when pandemic restrictions impacted sales. Analysts had expected sales to fall about 0.5%. The pivotal shift in spending from goods to services was expected, as consumers began traveling, eating out and attending events. Consumers also spent more on clothing and health and beauty products as they headed out into a world where mask-wearing was on the decline and vaccinations were on the rise. Online sales fell 0.8%, the second consecutive monthly decline, as people did more shopping in stores. The chronic shortage of both used and new vehicles limits spending in this traditionally big-ticket category. Home furnishings is one of the many categories plagued by shortages, with suppliers struggling to manufacture and deliver products. Furniture that used to arrive in six to eight weeks now takes six months. Sales at building material stores tumbled 5.9%. Core retail sales, which exclude automobiles, gasoline, building materials and food services, dropped 0.7% after a revised 0.4% fall in April. 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
Sanford Bernstein Strategic Decisions Conference:
CEO Craig Menear represented THD at the 34th annual SDC.
 
There is obviously cost pressure in the marketplace now, but cost pressure is a cyclical thing, and their merchants responsibility is to be the customer’s advocate for value. They work with their suppliers to try and help them mitigate as much pressure as possible and also look for product innovation that will help them alleviate pressure and drive value.
 
About 18% of their business is linked to commodities where costs change weekly. Those cost changes flow through to retail on a weekly basis. Other than that, they don’t translate costs to retail prices product by product. They take a portfolio approach and focus on driving the best value in a product.
 
They believe the pandemic accelerated the trend to omnichannel by at least a few years. They believe their customers are project-driven and will continue to blend the physical and digital worlds to complete their projects. The digital world will never replace the store; both channels are very important.
 
The consistency of the business throughout all last year and into the first quarter was truly amazing to them.
 
They really don’t play in the new construction market, so have not been impacted by smaller builders moving to the sidelines because they can’t get the margins they need.
 
The Pro business has improved quarter by quarter since the second quarter of 2020, with the Pro business for Q1 this year hitting the highest level since before the pandemic. It was also the first quarter since the pandemic began that the Pro business outperformed the DIY business.
 
They did not do much last year to drive traffic into the store so there was actually some benefit from less promotional activity, since many of those categories, such as lawn and garden, are lower margin.
 
During the height of the pandemic, nesting categories were selling like crazy; these are things that make homes more functional or comfortable. Now people are desperate to fly the nest, and that is coinciding with school vacation and summer.
 
The services business has improved for three quarters as people grew more comfortable having outsiders in their homes, and possibly more desperate to get some of their projects done.
 
The tool rental business has been a great addition to both their Pro and DIY offerings. The ability to rent tools and equipment enables people to tackle jobs without having to invest in expensive equipment they may not need in the long run.
 
They have gotten all of their numerous private-label brands to ratings of 4+ stars, and have multiple brands in excess of $1 billion, as well as some in excess of $2 billion and a few that are in excess of $3 billion. They pursue private label in areas where they believe brand is not relevant and private label allows them to bring better value to their customer.
 
Their business was built on meeting the needs of Pros; they know that when DIYers see Pros in the stores buying certain products and brands, that gives them confidence. Many serious DIYers will aspirationally upgrade to Pro-level products.
 
A lot of manufacturers have operations in China but are diversifying into other parts of the globe. Part of that is not related to the pandemic; it’s more a result of naturally rising costs inside China. Factories today are becoming more sophisticated and much more automated, even in China.
 
During the back half of last year they converted much of CV19 benefits into permanent enhancements in wages and benefits, and this year they’ve been able to hire more people as they ramp up for season.
 
There is a tremendous amount of uncertainty about the future; how will customers react as the economy opens back up and how will buying patterns change?
 
Many of the issues in the housing market are long-term; home ownership by the millennial generation, how they will engage in home improvement, how the shortage of housing in this country will impact home value appreciation, how Boomers aging in place will affect the stock of existing homes available for sale...it’s a long and complex list.
 
They have decided that what they can do is be flexible and well-prepared to both respond and take advantage of opportunities as they arise.
 
They are building out a network of capabilities to better serve both Pros and DIY customers. They began this cycle of investment in 2018 and are in what Menear described as the early middle innings.
 
They acquired HD Supply in order to position themselves to better serve the multifamily operators, which control about 50 million of the 130 million occupied households in the country.
 
Going forward, we will most likely not see the home value appreciation seen lately, but as long as values go up even 1% or 2%, people feel good about investing in their homes. Their key Pro is a repair/remodeler. With affordability going down people are often buying homes that need repairs and remodeling.
 
Other News:
 
The Home Depot Foundation partnered with the foundation of Rocket Companies to renovate 61 apartments in Detroit that will be used to provide homes for some of the 162 veterans that are homeless in the area. THD has committed $500 million to veteran causes by 2025.
 
Lowe’s
CEO Marvin Ellison was named chairman of the board of directors June 1. Ellison was appointed president, CEO and board member three years ago. He has more than 35 years of industry experience and was chairman and CEO of J.C. Penney prior to joining Lowe’s. He also spent 12 years in senior-level operations with The Home Depot.
 
After a strong 2020, they will focus on getting more sales from existing stores rather than building new stores or expanding through acquisition, according to Ellison, who was speaking to attendees at their virtual shareholders meeting. They are only interested in acquisitions that would help them grow their business or better serve their customers.
 
Lowe’s will also look to expand the products they offer online, including categories that may not be considered core home improvement categories. Because they already deliver a lot of big, bulky items such as appliances, it is easy for them to leverage those capabilities and expand into other categories that consist of large products.
 
Walmart
Walmart’s advertising revenue grew in triple-digits during the first quarter of fiscal 2022 as Walmart Connect helped brands target their advertising in stores and online by using Walmart’s vast treasure trove of consumer shopping data and their technology that allows them to process that information. Walmart estimates that each week approximately 265 million customers visit stores and their website all over the world. The proprietary technology can draw connections between online and offline behavior, craft consumer profiles and even attempt to anticipate shopping patterns and gauge demand for goods. Analysts note that how Walmart handles this program will determine whether people find it helpful or intrusive and scary.
 
Ace Hardware
The third annual Ace Rewards Day, which coincided with Amazon Prime Days, offered exclusive online deals and special offers for Ace Rewards members available exclusively online. Grills and grill accessories purchased online totaling $399 or more were eligible for free delivery and assembly.
 
Ace earned J.D. Power’s highest ranking for customer satisfaction once again. Ace ranked #1 in four of the five categories: Staff and Service, In-store Experience; Online Experience and Merchandise. Since the study launched, Ace has earned the top ranking in 14 of the past 15 years. The study is based on responses from nearly 2,172 consumers who have purchased home improvement products or services over the past 12 months. Ace had an overall satisfaction index score among major retailers of 863 on a 1000-point scale.
 
According to Ace Hardware, which surveyed Ace Rewards members, a whopping 74% of dads would rather man the grill on Father’s Day than have someone else grill for them. In addition, 29% of respondents said they would buy a grill for dad (or themselves) for Father’s Day, and 41% said they were ready to start hosting events and were likely to host a backyard BBQ this summer.
 
Amazon
Amazon will give corporate employees the option to return to the office three days a week and continue to work remotely for the other two days. In addition, employees will be able to work up to four weeks per year fully remote from a domestic location.
 
Amazon is opening their first Disaster Relief Hub, a facility in metro Atlanta storing emergency supplies. The hub will store more than a half-million Amazon-donated relief supplies in 10,000 cubic feet of fulfillment center space. Their disaster relief and response team is partnering with global humanitarian relief organizations to leverage Amazon’s scale and help improve response time to large-scale natural disasters around the world. The Disaster Relief Hub will initially support six global humanitarian aid organizations, including the American Red Cross, Save the Children and World Central Kitchen. NOAH is predicting another above-normal Atlantic hurricane season this year.
 
Jeff Bezos is known for his sometimes far-out ideas, but the soon-to-be former CEO of Amazon is headed off to outer space for real. On July 20, Bezos and his firefighter brother Mark will join the first crew to fly in a Blue Origin capsule. Bezos steps down as CEO on July 5. The passengers on the flight that will officially kick off Blue Origins space tourism business will all be winners of a charity auction. The capsule can hold six people, who will each have their own large window. Virgin Galactic’s Richard Branson also plans to launch aboard his own rocket this year after one more test flight. The launch date, which is scheduled for just a few weeks after Bezos steps down as CEO of Amazon, is the 52nd anniversary of the Apollo 11 moon landing by Neil Armstrong and Buzz Aldrin.
 
JP Morgan research estimates that Amazon could surpass Walmart to become the largest US retailer in 2022, based on Amazon’s growth in what is termed gross merchandise volume (GMV) a closely watched industry metric used to measure the total value of goods sold over a certain time period.
 
Amazon is fighting laws that would force them to more thoroughly investigate the identities of third-party sellers on the Amazon marketplace. The legislation, termed INFORM acts, has been proposed at both state and national levels, and supported by many big retailers, including The Home Depot. Amazon believes the proposed legislation favors large brick-and-mortar retailers and penalizes small businesses that sell online while doing nothing to prevent fraud and abuse and hold bad actors responsible.
 
Amazon has committed $200 million in capital to create a total of 1,800 affordable homes in Nashville and the Washington, D.C. metro. Amazon is providing below-market capital for developers in both markets as part of Amazon’s $2 billion Housing Equity Fund. Their goal is to preserve and create more than 20,000 affordable homes by making below-market loans to housing partners, traditional and non-traditional public agencies and minority-led organizations. The development in D.C. will be a unique transit-oriented community. Amazon said that housing and transit are the first and second-largest expenses for most households. 

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