Retail Sales Rise 0.5% Retail sales rose 0.5% in July after rising a downwardly revised 0.2% in June. Sales were well ahead of expectations and also were up 6.4% from July 2017. Sales increases were broad based and including a 1.3% rise in restaurant sales, which are now up nearly 10% from July 2017. Restaurant and bar sales are regarded as a highly discretionary category where increases indicate consumers are feeling confident and comfortable spending money. Core retail sales, which exclude autos, gasoline, building materials and food sales, also rose 0.5% in July after dropping a downwardly revised 0.1% in June. Online sales rose 0.8% in July and 11.3% year over year. Sales at building material stores were unchanged after rising 2.8% in June and were up 5.8% year over year. Many economists are unsure about how the trade wars and new tariffs will impact retail sales. NRF Upgrades Forecast The National Retail Federation (NRF) upgraded its retail forecast for 2018, saying that sales are now expected to increase at a minimum of 4.5% over 2017 rather than the 3.8% to 4.4% range forecast earlier this year, thanks to tax reform and other positive economic inputs. Retail sales grew 4.8% year over year in the first half. NRF warned that despite the upgrade, uncertainty surrounding the trade war and higher inflation could make consumers cautious in the fall and heading into the all-important holiday season. The Home Depot Q2 sales rose 8.4% to $30.5 billion, beating expectations of $30.03 billion. Comp store sales rose 8%, well ahead of estimates of a 6.6% increase. Online sales grew 26%. THD raised their earnings forecast for the year. They also expect comp sales growth of 5.3%, up from the previous forecast of 5% growth and total sales growth of 7%, up from the previous forecast of 6.7%. From their Q2 conference call with analysts: The majority of sales they missed in the first quarter were recovered in the second quarter; they call that the bathtub effect. There was broad-based strength across the store and in all geographies. All three divisions posted positive comps, along with all 19 regions and top 40 markets. Canada posted mid to high single digit positive comps in local currency. They have now rolled out small parcel express delivery from stores via car and van in nearly all of their major markets and plan further expansion. They are focused on offering the fastest, most efficient delivery in home improvement. Their fulfillment center tests are on track, and they opened their first Market Delivery Operation (MDO) during the quarter and plan to add additional facilities in the second half. The build out of the One Home Depot supply chain is truly a collaborative team effort involving the real estate team, the IT team and the supply chain team. They have implemented their way-finding sign and store refresh package in more than 500 stores so far, ahead of plan, and are very pleased with the customer response to all the improvements. It is much easier to find things in the stores that have been done, and they are more inviting and easier to navigate. They are also making progress on the rollout of their redesigned front end areas and Buy Online Pickup In Store (BOPIS) lockers, and are only seven months into a planned three-year investment journey. Comp average ticket increased 4.9% and comp transactions increased 2.9%. Commodity price inflation in lumber, building materials and copper positively impacted average ticket growth by 119 basis points. Tools and appliances had comps above the company average. Big ticket sales have been redefined and now describe transactions over $1,000 rather than the $900 they previously used. Big ticket sales account for approximately 20% of US sales, and were up 10.6% in the second quarter. Strength with Pros was one of the drivers. Sales to Pro customers were up in the double digits and sales to DIY customers were solid. The Home Depot owns and backs the Husky brand of tools and will be introducing some great new innovations in mechanics tools and plumbing tools. All of their Husky brand hand tools are backed by a lifetime warranty and can be replaced at any store. At the end of the quarter merchandise inventories were up 9.1% to $14 billion. Inventory turns were up one-tenth to 5.4. They are not concerned about the drop in housing starts and new home sales and feel very positive about the strength of the home improvement market and the customers’ willingness to spend. The housing shortage has driven up home values and the appreciation gives homeowners more equity, so they feel more comfortable spending. The business to business (B2B) website they are developing for Pros is still in the customer intercept and interview phase and they are in testing mode. They may do a small test in Q3 and expect more activity in Q4. They are at record-high levels of in-stock, which they felt was critically important in order to be able to capture the additional seasonal sales that they expected from the bathtub effect. They are also at a high in-stock because of all the merchandise resets they are doing. They believe the percentage of sales Pros account for has gone from 40% to 45%. Improving the website offers unanticipated benefits, as shopping in categories that people actually purchase in store, such as flooring or doors, usually starts online and they are seeing great engagement with the customer across those categories. Other News: Robert Bosch announced a new partnership with The Home Depot that brings Bosch home appliances to the world’s largest home improvement retailer. Appliances will be available both in-store and online. EVP of Merchandising for the Home Depot Ted Decker said that they were thrilled to be partnering with Bosch and benefitting from Bosch’s more than a century of product innovation and engineering expertise. Lowe’s Q2 sales rose 7.1% to $20.89 billion and comp sales rose 5.2%, below estimates. Lowe’s cut their forecast for the year, and now expects sales to rise 4.5% and comp sales to grow about 3%. From their Q2 conference call with analysts: This was new CEO Marvin Ellison’s first conference call since taking over as CEO July 1, although he was of course not with Lowe’s during the second quarter. Ellison has been traveling extensively around the country to talk with Lowe’s customers and conduct town hall style meetings with associates. He noted that being number two in home improvement offers them many opportunities to grow and take advantage of the dedication and skills of Lowe’s associates, whom he praised for carrying on despite significant organizational challenges as well as a challenging competitive environment. Ellison will focus on better connecting and aligning all their systems to create a world-class omni-channel environment, simplifying the business to produce better and more consistent results and focusing on initiatives that add value and are core to their retail business. Many executive changes had been announced prior to the conference call. In conjunction with the call, Ellison announced that David Denton will be the new CFO. Denton will join Lowe’s from his current position as EVP and CFO of CVS Health at the end of the year after CVS’ acquisition of insurer Aetna is completed. Current CFO Marshall Croom is retiring. They are working aggressively to fill the open position of CIO and expect to have someone named shortly. They have decided to close all 99 existing Orchard Supply hardware operations so they can focus on their core home improvement business. Stores and one distribution facility are located in California, Oregon and Florida. Their strategic assessment showed that investing the intellectual and financial capital that would be needed to grow Orchard Supply into the most dominant small box specialty home improvement retailer would make a very minimal impact overall on Lowe’s business and that capital could be better spent elsewhere. They are eliminating about $500 million in planned capital projects for 2018 that did not meet their new criteria and will reallocate those funds to share repurchase. The new leadership team has been charged with the task of developing an aggressive plan to rationalize store inventory to remove clutter and reduce lower performing inventory, so they can invest in improved job lot quantities for Pros and increase the depth of inventory in their top 2,000 high-velocity SKUs. Total transactions grew 1.3% and average ticket grew 5.8% to $75.53. They drove market share gains across all major categories when they introduced Craftsman. They are excited about the continued rollout of Craftsman over the second half. They will also be leveraging their exclusive relationship with Sherwin-Williams. Pro demand and inflation drove strong comps in rough plumbing and electrical and lumber and building materials. They are working diligently to simplify the reset process as it adversely impacted performance in some categories. Pro is a huge opportunity for them; right now about 30% of sales come from the Pro segment. In addition to inventory issues and job lot quantities, they need the brands Pros want, and they are already analyzing their brand gaps and what they need to fill them. They are not going to “throw payroll” at problems, but rather take the time to identify root causes and then come up with solutions. Ellison said that he believes the challenge today is less about the competition and more about looking within and asking where they can be better. He acknowledged that they have a disadvantage in real estate locations in metro areas compared to Home Depot, especially in the Northeast and West Coast. They created some issues with their online business that resulted in a significant number of order cancellations and had a dramatic impact on overall internet sales, but now they have an opportunity to overcome some of the problems, particularly poor execution. They are assembling what Ellison called a very impressive team of online experts from some impressive competitors as well as a lot of other different backgrounds. The biggest opportunity is making the site more user friendly from search to navigation to checkout, and they have a very specific roadmap to do that. The second big challenge is seamlessly connecting their digital and physical footprints. Roughly 60% of ecommerce transactions are picked up in store, which offers them a significant number of opportunities. Ellison thinks their overall challenge is less about over-spending than it is about making better strategic choices concerning what they spend their money on. Ellison noted that they have very impressive competitors and if they are going to gain market share, they have to be very customer focused. They also have to learn to excel at what he called “retail fundamentals” while making strategic plans and investments that will help them grow share in the long run. He is very pleased with his conversations with the suppliers he’s been able to spend time with so far; with Mike McDermott handing the reins over to Bill Bolts, they will be spending more time with both existing suppliers and with suppliers that they don’t currently work with to see if they can add additional brands that resonate with their DIY and Pro customers. Walmart Q2 sales rose 3.8% to $128 billion, beating estimates of $125.97 billion, and comp store sales rose 4.5%, nearly double analysts’ expectations. WM also raised their forecast for annual comp store sales, and now expects them to rise about 3% in fiscal 2019, up from previous estimates of 2%. Ecommerce sales grew 40% during the quarter, up from 33% growth in the first quarter. WM expects online sales to grow 40% for this fiscal. Foot traffic grew 2.2% and average ticket rose. Walmart says they are experiencing significant margin pressures driven by cutting prices, higher freight costs due to a shortage of truck drivers and ecommerce investments. Walmart is now selling high-end brands like Ray-Ban and Calvin Klein, thanks in part to their new partnership with Lord & Taylor, which give customers access to 125 high-end brands without the high-end price tag. Sears Sears plans to close an additional 46 stores in November. There appears to be no end in sight to the closures, as Sears says they are continuing to evaluate their store network and will make further adjustments as needed. In January, Sears announced it would close more than 100 stores this year. They announced another round of about 100 store closures in May, when the store count was 894. Sears is still testing new concepts, like stand-alone mattress stores and combined Sears and Kmart locations, but retail analysts say it will be hard for the company to bounce back from its dire situation. Sears is reportedly evaluating a bid from CEO Eddie Lampert’s hedge fund, ESL Investments, to buy the Kenmore appliance brand from Sears for $400 million. Sears shares have fallen more than 85% over the past 12 months, bringing the company's market cap to roughly $123 million, or less than Lampert is willing to pay for the Kenmore brand. Sears will continue to sell their versions of Craftsman tools in Sears and Kmart stores as well as Sears Hometown and Outlet. All other retailers will have the new Craftsman line designed and produced by Stanley Black & Decker. The media coverage noted that having competing and different versions of the same product sounded like a recipe for brand disaster, but Sears says they are not concerned, and said both companies agreed to a set of brand standards and guidelines. SB&D will pay Sears royalties on all Craftsman tools sold for 15 years. Sears has expanded their program to install and balance tires for customers who buy tires on Amazon to hundreds of additional stores and says the response from Amazon customers has been extremely positive. The test was originally launched at 47 Sears stores. ACE Hardware Q2 revenues rose 6.4% to $1.59 billion. US comp store sales rose 3.3%. Net income grew 7.2% to $54.8 billion. Comp sales of the 3,000 Ace retailers who share daily retail sales data rose 3.3%, due to a 4.1% increase in average ticket, partially offset by a 0.8% decrease in comp store transactions. There was growth across all of Ace’s business units. They added 39 new domestic stores in the second quarter and cancelled 34 stores, leaving the total domestic store count at 4,423, an increase of 66 stores from Q2 2017. Revenue increased 21.6% to $109.8 million at Westlake Ace Hardware, also known as Ace Retail Holdings. The increase was fueled by new store growth. Ace highlighted a wide variety of dealer success stories during the co-op’s Fall Convention in Chicago, and also addressed some challenges. One big challenge is the disappointing performance of the supply chain during the recent high-demand spring selling season. CEO John Venhuizen noted that the supply chain did not meet their high expectations in several areas of the country. Rapid growth, an unprecedented surge in demand spurred by the late spring, a shortage of truckers and high turnovers in distribution centers was exacerbated by labor shortages and very low unemployment across the country. Ace added $150 million in inventory to retail support centers and established new rules that penalize vendors for late shipments. The new rules have led to a 10% improvement in on-time shipments. Ace has also instituted a retention bonus to reduce turnover in their DCs and moved up the expansion of their Ohio facility by a year. Ace launched their new hyper-localized Acehardware.com website July 30th and reported that web traffic was up 34% in the second quarter from the same period last year. Within the next two months Ace will launch an Uber-like tool called “Where’s my truck?” that shows retailers the location of delivery trucks. CEO John Venhuizen emphasized that they need to invest for the long-haul, and think in quarter-centuries, not quarters. Ace is committed to implementing what they called a “Logistics Revolution” in 70% of the country by the second quarter of 2019 that will make Ace faster than Amazon on the 100,000 items Ace stocks. True Value For the first time in their history, True Value will open their semi-annual Reunion to all independent hardware dealers. The reunion is scheduled for the end of September in Denver, Colorado. It will be the first Reunion since True Value reorganized itself into what they call the only hardlines wholesaler that offers access to a globally recognized brand with no investment required. Throughout the three-day event attendees will have access to nearly one million square feet filled with attendee-only deals. Amazon At least eight top execs have left Amazon in the past six months. Amazon Prime chief Greg Greeley joined Airbnb as president of the homes division, Sebastian Gunningham stepped down as SVP of Amazon seller services to become WeWork’s vice chairman, and Sanjay Shah, VP of North American fulfillment centers joined Tesla. Amazon has also lost senior people to Snapchat, German ecommerce company Zelando and SoFi. Amazon says that they have a more than 95% retention among vice presidents, and approximately 100 executives who left Amazon eventually returned. The phenomena is so common, Amazon refers to them as boomerangs. Analysts noted that tech people are also taking sabbaticals now, as they know getting another job will be easy. They also acknowledge that some of the departures may be due to the impending creation of HQ2, Amazon’s second North American headquarters. Amazon says they will not require anyone to move but will allow existing senior leaders across the company to decide whether to locate their teams in HQ1, HQ2 or both. Amazon is merging their ad business into one platform under Amazon Media Group so that advertisers will be able to buy campaigns from the same place, whether they sell their products directly to the site (shown as Sold by Amazon) or directly to Amazon shoppers as third-party sellers. The Media Group will consolidate Amazon Marketing Services and Amazon Advertising Platform divisions under one banner. While there could be some short-term impact, in the long run centralizing branding, content product creation merchandising and advertising should make it easier for brands to see the total traffic to their products and identify where that traffic is coming from. Amazon has been working at giving both first party and third party sellers access to the same features. Amazon generated $2.2 billion in ad revenues in the latest quarter, while Google and Facebook posted $28 billion and $13.3 billion, respectively. One industry analyst said that Amazon’s ad business was still “in the awkward toddler stage” compared to its more mature rivals. Amazon is looking to fill more than 200 full-time positions with benefits with employees who would work from home. Nearly all of the positions are for jobs in customer service, sales and human resources. The full-time employees hired will be eligible for all the usual Amazon benefits, including medical, dental and paid time off. Amazon’s pilot training program designed to turn veterans into technologists graduated its first five students, who all joined Amazon Web Services as full-time employees. Amazon says this is just the beginning. Amazon enlisted the help of Apprenti, the apprenticeship program overseen by the Washington Technology Industry Association, which is partly funded by the federal government. The White House has pushed for companies to hire more veterans. Amazon is expanding their alliance with Kohl’s, with 100 Kohl’s locations now accepting Amazon returns. Kohl’s started the test with Amazon return centers at 21 stores in July. A total of 82 of the locations are in Chicago and Los Angeles; ten of them also have Amazon “smart home” shops selling items such as Echo speakers, Fire tablets and Kindle readers. © Robert Bosch Tool Corporation. All rights reserved, no copying or reproducing is permitted without prior written approval.
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