Distribution September 2019
Retail Sales Increase 0.7%
Retail sales rose 0.7% in July after rising a downwardly revised 0.3% in June and were up 1.0% from July 2018, according to the latest figures from the Commerce Department. It was the fifth consecutive month retail sales increased. Core retail sales, which exclude food services, car dealers, building-materials stores and gasoline, rose 0.7% after a downwardly revised gain of 0.4% in June. Core retail sales correspond most closely with the consumer spending component of GDP. Online and other non-store sales were up 2.8% from June, a gain that might be attributed to the impact of Amazon’s Prime Day sales. Building materials and garden supply stores were up 0.2% from June but down 0.5% year over year.
Retail Store Traffic Up
Retail traffic rose in the second quarter, according to Placer.ai, a foot traffic analytics platform. Traffic was up 38% at Lowe’s, 35% at Home Depot and 27% at Ace Hardware. Home Depot and Lowe’s together accounted for more than two-thirds of store visits in the DIY category, with Home Depot in the lead at 39%.
The Home Depot
Q2 sales rose 1.2% to $30.84 billion, slightly below analysts estimates. Comp store sales were up 3.0%, also below estimates. Profits came in ahead of estimates, but THD lowered their sales forecast for fiscal 2019, and now expects sales growth of 2.3% rather than the 3.3% growth forecast earlier. The comp stores sales forecast was lowered from 5% growth to 4%. THD noted that lower lumber prices and rising lumber sales were cutting into revenue.
Home Depot Q2 Conference Call with Analysts:
All US divisions posted positive comps, as did 17 of 19 US regions. The exceptions were the Gulf and Florida regions, which delivered very high storm-related comps last year. Canada comps grew in the low single digits in local currency.
With the exception of lumber, all merchandising departments posted positive comps. Tools and building materials were among the categories that posted above-average comps.
Comp average ticket rose 2% and comp transactions rose 1%. Lumber negatively impacted average ticket growth by approximately 110 basis points, with prices for popular products like OSB sheets continuing to drop.
Big ticket comp transactions over $1,000, approximately 20% of US sales, rose 3.7%, partially reflecting the impact of hurricane-related sales last year and lumber price deflation. Excluding hurricane-related markets, big ticket comps were up nearly 5%.
Pro sales once again outpaced DIY sales in the US. THD is on track to have one million Pros on their B2B website by the end of the year.
They have been working on appliance resets and tool sales for some time, and those two businesses continue to post incredibly strong results.
They have implemented their way-finding signage and store refresh package in more than 1,400 stores. Customer service scores in the category of neat and clean have increased
140 basis points. Customer service scores for checkout time satisfaction have increased more than 450 basis points thanks to the frontend store investments they’re making, which are now in place at more than 400 stores. 87% of customers give them the highest score when asked if they are likely to shop at Home Depot again.
Online sales grew 20% from Q2 2018 and they are seeing incremental growth from new categories like pool and workwear. During the quarter approximately 50% of all online US orders were picked up in stores.
They are on track with their plans to create the fastest and most efficient delivery network in home improvement.
They are working on accelerated merchandise and resets focused on upgrading showrooms, improving visual merchandising and refining assortments to drive a better in-store shopping experience.
They opened two new stores during the quarter, one in the US and one in Mexico, for an ending store count of 2,291. Selling square footage was 238 million square feet and total sales per square foot were $510, up 1.1% from 2018.
The impact of transportation on gross margins has moderated from last year and they are excited about the productivity they are seeing in their upstream supply chain.
They are constantly working on the impact of the tariffs; at 10% it has a potential impact of about 2% of US sales. Suppliers are generally moving at least some manufacturing out of China to Taiwan, Thailand, Indonesia and even back to the US. All these efforts reduce the net impact to about 1%; then it’s up to the merchant team to work it through and see how much, if any, of the impact they can pass along to customers.
Most price increases are mix-driven in the sense that customers are trading up to more innovative, higher priced goods. The growth in average ticket has been largely driven by new product introductions which are higher price points because of innovation; for example, a cordless lawnmower is considerably more expensive than a push gas mower.
Right now they are making a lot of investments in their physical locations to make shopping easier and more rewarding for both consumers and Pros.
Home Depot has reportedly set up what employees called a “tariff war room” to analyze products and costs and devise pricing strategies. Home Depot’s CFO Carol Tome told CNBC that they were working with suppliers to offset tariff costs but acknowledged that some of the costs will have to passed along to consumers.
THD is reportedly shopping for sites for new fulfillment centers, part of a $1.2 billion overhaul of their US supply chain. The new centers could range from between 750,000 square feet to more than one million square feet. THD plans to add at least 170 distribution centers across the US over the next five years in hopes of speeding up delivery of products to homes and job sites. Ultimately, they want to be able to reach 90% of the population with same-day or next-day delivery. CEO Craig Menear told the Atlanta Business Chronicle that the supply chain overhaul is part of a $11.1 billion investment they are making to better handle the rise of online shopping.
Q2 sales rose 0.5% to $21 billion from $20.9 billion in Q2 last year, slightly exceeding estimates. Comp sales were up 2.3%, led by a 3.2% increase in comp sales in the US. They maintained their guidance for the year, and expect sales to grow 2% and comp sales to grow 3%.
Lowe’s Q2 Conference Call with Analysts:
All 15 geographic regions saw positive comps. Three of their top four performing regions were in the Western division. Atlanta, Boston, Charlotte and Tampa also delivered outstanding results. They posted negative comps for the quarter in Canada, largely due to their ongoing RONA integration.
Comp transactions rose 0.3% and average ticket grew 3%. Pro comps significantly outperformed DIY comps during the quarter.
Tools delivered strong mid-single digit comps and they continue to see market share gains from the Craftsman resets.
Weather was particularly challenging early in the quarter. Commodity deflation exerted 110 basis points of pressure on comp sales.
Pro performance was driven by investments in job lot quantities coupled with their improved service model. Service scores with Pros increased 900 basis points. Pros are now getting more job lot quantities, dedicated loaders, preferred parking under the canopy, dedicated department supervisors and a new customer-friendly field structure. They are pleased so far but are pursuing many additional opportunities to deepen their relationships with Pros.
They are leveraging key brands to grow their Pro business, including Bosch, Metabo HTP and DeWalt. They will be launching DeWalt’s 12-volt cordless Xtreme brushless platform during the third quarter.
Lowes.com posted positive comps of 4% and accounts for about 5% of sales, so is an area with tremendous growth potential. Several actions made key contributions to growth, including slowing down the number of new SKUs added during the quarter while addressing systems and process issues that negatively affected stores’ productivity.
They also took steps to improve the quality of their online business by eliminating certain programs that were unprofitable. The move cut into short-term growth but better positions them for long-term success.
They are taking aggressive steps to improve the technology foundation of lowes.com and replatforming the entire site to Google Cloud.
Construction of their new global technology center began in August with plans to open in 2021.
All the initiatives they’ve put in place are helping them make steady progress to better serve customers, position the business for long-term success and improve results in categories that have consistently underperformed for them.
Over the next 12 months they’ll be focusing on two major initiatives to modernize systems and pricing tools. First, the deployment of their new price management system will allow them to do a better job of systematically analyzing, prioritizing and implementing retail pricing programs. The new system will be in place by the end of the year.
Their second initiative is focused on fully integrating their acquisition of the Boomerang retail analytics platform. The integration will let them incorporate Boomerang’s technology into their core retail business, which will facilitate data-driven pricing and let them make better merchandising decisions as far as assortments go. The integration should be completed during the first half of 2020.
This year they invested in inventory in order to improve sales performance in Q1 and Q2. Part of the transformation of their supply chain includes rolling out predictable delivery and product flow to the stores. During the second half they’ll be strategically managing down inventory while protecting their in-stock position and margins.
Focusing on retail fundamentals drove strong performance in areas of historical strength and improved performance in categories which have historically underperformed.
The strength in Craftsman came from power tools, tool storage and mechanics tools.
They introduced new and innovative products from Bosch, Spyder and Metabo HPT and leveraged key programs from DeWalt.
In Q3 they will remain focused on retail fundamentals and driving profitable sales. They will continue to use Craftsman to drive traffic.
They are working with their vendors and making sure they are managing costs and getting the right support for all the efforts they are doing in the stores.
They’ll be leveraging the partnership with the NFL they announced in January, which allows them to advertise with the NFL during and off-season, including special events like the Super Bowl and the NFL draft. Lowe’s will be the presenting sponsor of the Superbowl Experience, an interactive park for NFL fans that debuts at Super Bowl LIV in 2020 in Miami.
Their investments in stores are paying off. They armed associates with SMART phones that provide real-time data and added more than 600 assistant store managers and 5,500 department supervisors. That allowed them to add 120 customer-facing hours per store per week without negatively impacting payroll.
Their research shows that certain DIY customers traditionally shop the store about four times a year, so it’s very important to execute the retail events that pull in traffic. In the past they’ve had out of stock problems and service issues for big events like Spring Black Friday and Holiday. This year they are putting enormous emphasis on great execution and not disappointing customers.
Lowe’s will lay off thousands of store employees that are part of the merchandise assembly and maintenance staff and outsource their duties, such as assembly of barbecue grills, wheel barrows and other products along with janitorial duties in stores and at other locations. Lowe’s currently has 190,000 full-time and 110,000 part-time workers in stores and other facilities in the US and Canada. Affected associates will reportedly be given transition pay and the opportunity to apply for open positions at Lowe’s.
Q2 revenue rose 1.8% to $130.38 billion, beating expectations. US net sales rose 2.9% to $85.20 billion. Comp sales in the US were up 2.8% excluding fuel, handily beating expectations. Online sales jumped 37%. Transactions were up 0.6% and average ticket rose 2.2%.
WM said their online business has gotten a boost from their gradual rollout of next-day delivery, which now reaches about 75% of the US population.
Walmart’s CMO Barbara Messing stepped down the end of August in order to return to the San Francisco Bay area with her family. Michael Francis, the former CMO of Target, will lead a newly formed retail marketing team on an interim basis. He’s been consulting with Walmart since 2015. Messing was Walmart’s third chief marketer in four years.
Q2 revenue rose 6.3% to $1.69 billion. US comp sales rose 1.7% and online sales jumped 58%. Total wholesale revenues rose 4% to $1.53 billion. Ace added 33 new domestic stores in the second quarter and cancelled 23.
Ace will begin charging vendors a 1% fee for all distribution center and drop-ship purchases beginning January 1. They are terming the fee the Ace Hardware Transformational Growth Allowance. Ace says the fee will support growth in two primary areas, advancing the brand and enhancing the supply chain. Ace VP of Merchandising Brian Wiborg told vendors that the co-op’s board of directors approved $2 billion in wholesale and retail investments in order to pave the way for another 800 stores and more than $20 billion in sales over the next five years. He said the allowance is 100% focused on growth. Ace will reportedly spend 50% more marketing dollars over the next five years to boost instore and online traffic. Ace will make significant investments in their website, digital marketing and the customer experience and expand their retail support network to handle more products and faster shipments. Ace’s wholesale sales have grown from $4.2 billion in 2013 to $6 billion today.
CEO John Venhuizen told the Wall Street Journal that the fact that they have more than 5,000 stores gives them a distinct advantage over Home Depot and Lowe’s. More than 75% of US households are within 15 minutes of an Ace store, and they have more physical stores than Home Depot and Lowe’s combined. Right now about 2,100 or 2,200 of those stores have bought into the buy online deliver from store program available on their website. And almost every Ace store does local delivery on their own. Delivery expenses are born by the individual store, so buying into the program requires commitment. Venhuizen said big, bulky “obnoxious” products are the vast majority of what they sell online. People don’t want to pay to ship big bulky products and they don’t want to have to figure out how to assemble them. The average Ace store is about 10,000 square feet; the average Home Depot or Lowe’s is ten times bigger, which means the stores are harder to navigate and can be intimidating, especially to people who just want to find out how to fix something and buy whatever is needed.
W. W. Grainger
CEO D.G. Macpherson warned that margin pressure was really going to impact next year’s sales and profits, because so far rising sales volumes have blunted the impact of price cuts on profitability. Macpherson said they know they are in a slowing, choppy market and sales growth will not be as great as they hoped. Economic indictors point to an industrial slowdown, according to Macpherson, and they are also dealing with rising costs for the products they sell. They are also facing a “growing threat” from online rivals. Amazon launched their business distribution unit in 2012.
Amazon started using robots to deliver some items in California in August after several months of tests in a neighborhood near Amazon’s headquarters in Seattle. According to Amazon, Scout devices have made thousands of successful deliveries, and navigated successfully around a wide variety of residential obstacles, including trash cans and skateboards. Scout is described as being the size of a small cooler, and travelling on sidewalks at a “walking pace.” The test in Irvine, California launched with a small number of Scouts making daylight deliveries on weekdays. There are dedicated software and hardware labs working on Scout in Seattle. Amazon says the Irvine test is just another in the many steps forward Scout will need to take before it can be deployed nationwide.
Treasury Secretary Steve Mnuchin said that Amazon has “destroyed” the US retail industry as the Trump administration announced a broad antitrust review into whether technology companies are using their power to limit competition. Amazon countered by pointing out that small and medium-sized businesses thrive on Amazon’s marketplace and rang up $160 billion in sales last year. Amazon also pointed out that approximately 90% of US retail sales still take place in physical stores, according to the Commerce Department. Amazon accounts for less than 4% of the US retail market, according to the company.
Amazon is partnering with Realogy, the largest residential real estate company in the US, in order to get Amazon’s home products and services in front of more customers. Reaology is the New Jersey-based parent company of brands that include Better Homes and Gardens Real Estate, Century 21, Coldwell Banker, Sotheby’s International and ERA. Potential homebuyers in 15 cities can go to Amazon’s website and be matched with a real estate agent from one of the companies. If they eventually close on a house, Realogy will pay for up to $5,000 worth of Amazon Home Services and Alexa-enabled smart home products. They are calling the partnership TurnKey. It’s designed to help Realogy compete with tech-focused brokerages including Seattle-based Redfin, and drive adoption of Amazon products and services. Amazon offers services including home improvement, plumbing, electrical, and odd jobs through Amazon Home Services and has a range of smart home products, including the Ring smart doorbell and Echo smart speakers and smart home hubs. Last year Amazon partnered with homebuilder Lennar to host showrooms with smart tech and offer Amazon services to people who buy Lennar smart homes. The value of the benefit varies based on the price of the home; a homebuyer would have to buy a house for $700,000 or more to receive the full $5,000 benefit.
Amazon is pressuring brands to make their packaging more efficient, more compact and easier to open. Eventually Amazon wants every product it ships to meet similar standards. Amazon has also been pressuring companies to sell products in quantities and at prices that that best fit Amazon’s storage and delivery systems; brands that don’t comply are being cut from the site. Amazon is also asking makers of consumer products to develop brands for Amazon to sell exclusively rather than develop their own private label products from scratch.
© Robert Bosch Tool Corporation. All rights reserved, no copying or reproducing is permitted without prior written approval.