Distribution December 2017

Retail Sales Rise 0.2%
Retail sales rose 0.2% in October after rising an upwardly revised 1.9% in September.  The slight increase in sales was still better than economists had expected. Sales were up 4.9% from October 2016. Gasoline sales fell sharply as prices dropped after surging before and during the hurricanes. However, automobile sales continued to rise as people replaced vehicles lost in the hurricanes and dealers offered bargains marking the end of the model year. Receipts at service stations decreased 1.2% in October. That followed a 6.4% gain in September. Excluding automobiles, gasoline, building materials and food services, core retail sales, which factor into GDP, increased 0.3% in October after climbing 0.5% in September. Sales at gardening and building material stores fell 1.2% in October after surging 3.0% in September. Sales at online retailers fell 0.3% after rising 0.5% in September. Retail sales account for one-third of all consumer spending, with services accounting for the other two-thirds. 
 
Post Office Increases Holiday Delivery
The U.S. Postal Service is planning to offer next-day service with packages delivered Sundays during the holiday delivery period in 20 major U.S. cities. Consumers will be able to place online orders with participating retailers before a cutoff time on Saturday. Postal carriers will pick up merchandise from local stores for delivery the following day. The program is similar to the Sunday package deliveries the Post Office currently handles for Amazon. Nearly 850 million parcels are expected to be delivered in the U.S. from Thanksgiving to New Year’s Eve, a 13% increase over last year.
 
Holiday Shopping Update
More than 50 retailers were closed on Thanksgiving Day, including Lowe’s, Home Depot, Ace Hardware and Sam’s Club. Other retailers opened later on Thanksgiving. Target wanted to give their employees a breather, so they opened at 6 p.m. Thanksgiving night and closed at midnight before reopening at 6 a.m. on Black Friday. However, Target also gave holiday shoppers a jump by offering select Black Friday deals in all of its stores and on its website on Monday November 6.
 
The number of people visiting U.S. stores on Thanksgiving and Black Friday dropped 4% from last year, according to RetailNext. Online sales increased 18% to $7.9 billion, according to software company Adobe Systems. Some retailers offered in-store deals that were not available online in order to entice people to shop in the store. Deloitte projects that ecommerce sales will grow 18% to 21% over the holiday shopping season.
 
Cyber Monday was the biggest online shopping day in U.S. history as consumers spent $6.59 billion shopping online, up from $5.65 billion last year. Consumers spent $5.03 billion online on Black Friday. The strongest surge in online purchases was between 8 p.m. and 11 p.m. in every time zone as consumers quit researching and paid for items in their carts.
 
For both Cyber Monday and Black Friday mobile users made up more than 47% of all visits to shopping sites, with 39.9% shopping on smart phones and 7.6% shopping on tablets.
 
The Home Depot
Q3 sales rose 8.1% to $25.03 billion. Comp store sales overall rose 7.9%; comp sales for the U.S. rose 7.7%. Average ticket rose 5.1%, with average ticket growth impacted by commodity price inflation in lumber, building materials and copper. Transactions rose 2.5%. Results beat analysts’ expectations.
 
Hurricane-related sales positively impacted their comp store sales growth by about $282 million during the quarter. The gross margin on hurricane-related sales was considerably less than the company average. They also incurred approximately $104 million of hurricane-related expenses. Operating profit for the third quarter was negatively impacted by about $51 million.
 
From their Q3 Conference Call with Analysts:
 
Due to their outperformance in the third quarter and sales from the rebuilding efforts associated with the storms they increased their sales and earnings guidance for the year. They now expect fiscal 2017 sales to increase by 6.3% with positive comps growing 6.5%. They expect hurricane-related spending to impact sales through the first half of 2018. As people move from preparation for the storms into recovery they see a more normalized mix of sales across the business. They are projecting a longer stretch of sales due to Hurricane Harvey because so much of the destruction was due to flooding and many people were uninsured.
 
Mexico and Canada both posted positive comp sales in local currency. They opened one new store in Mexico during the quarter.
 
Online sales grew 19% for the quarter and now represent 6.2% of total sales, with approximately 45% of online orders in the U.S. picked up in stores. More than 85% of online order returns are done in stores. They used to believe that some categories would not actually sell online, but in the past several years they’ve come to realize that it is all interconnected and that online sales come from almost all categories.
 
Store delivery grows every week and they are currently piloting other delivery options.
 
The supply chain and their supplier partners did a fantastic job of supporting the business despite the high demands caused by major hurricanes in Florida and Texas and wildfires in California, including 236 stores that had to be closed for some period during the quarter. It added up to a cumulative 809 days, which was the equivalent of having 2.2 stores closed for an entire year. They are focused on creating the fastest and most efficient supply chain in home improvement and to do that they are planning and collaborating much more with their vendors and synchronizing the flow through the supply chain.
 
Pro sales gains outpaced DIY sales for the quarter once again, but they saw healthy gains in both categories. Sales to professional customers grew double digits for the quarter, with similar growth rates in both high-spend and low-spend pros. Their Pro-heavy categories, including lumber, wire, insulation, gypsum and hand tools, saw double-digit growth for the quarter. Storm related categories also saw significant growth, with double-digit comps in generators, wet/dry vacs, tarps and ladders.
 
Comps in non-impacted markets remained strong with healthy growth in both ticket and transactions.
 
In the fourth quarter they will introduce important new power tool offerings, including the DeWalt FlexVolt cordless air compressor that works with all the pneumatic tools customers already own. They are also introducing Makita’s new LXT product line offering 36-volt power to reciprocal, circular and miter saws as well as grinders.
 
They are working with product manufacturers to increase their connected and smart home offerings and find the best ways to display these types of products in a home center.
 
They are rolling out Pro MRO, which gives pro customers shopping in their stores access to the Interline catalog and they are seeing those sales increase week after week.
 
They are also focusing on their ProPurchase card, which they described as a pro access card. It gives the Interline customers access to shop their stores and swipe their cards and have their purchases billed back onto their accounts.
 
Other News:
 
THD is dropping dangerous chemicals such as formaldehyde as part of a strategy to “go greener.” They will be strengthening chemical oversight practices in paint, carpet, vinyl and laminate flooring and insulation. Several other national retailers, including Walmart, Target and Costco, have already cut back on many of these dangerous substances. 
 
Lowe’s
Q3 sales rose 6.5% to $16.8 billion, ahead of expectations of $16.6 billion. Comp store sales rose 5.7%, well ahead of expectations. Comp store sales in U.S. stores rose 5.1%. Lowe’s said they can trace $200 million in sales to the hurricanes in Texas and Florida.
 
From Lowe’s Q3 Conference Call with Analysts:
 
Comp sales growth of 5.7% was driven by a 4.8% increase in comp average ticket and transaction growth of 0.9%. Total customer transactions grew 0.7% and total average ticket grew 5.8% to $72.63. Hurricane-related sales contributed 140 basis points to comp growth. Lumber and building materials led product category growth with double-digit comps, driven by Pro demand, hurricane prep and cleanup and inflation. Appliances also posted double-digit comps. They achieved positive comps in all regions and all product categories.
 
Online comps grew 33% over the quarter, and they are seeing positive customer response to their evolving omni-channel capabilities. According to CEO Robert Niblock, they were recognized by Fortune Magazine as one of the top 10 most engaged companies. Right now 60% of online sales are picked up in store and 40% of those customers buy additional products while they are in the store.
 
Lowe’s Canada delivered high single-digit comps, and they made further progress integrating RONA, continuing their rollout of appliances and converting their second RONA big-box store to a Lowe’s branded store.
 
Their integration of Maintenance Supply Headquarters and Central Wholesalers remains on track.
 
Their third quarter consumer sentiment survey showed that consumers have an increasingly positive view of both the national economy and their personal financial situation.
 
They announced that Chief Operating Officer Rick Damron will be retiring in February after 36 years with Lowe’s, the last five as COO. He will be succeeded by Richard Maltsbarger, currently their Chief Development Officer and President, International.
 
They sent more than 1,000 truckloads of products to areas impacted by the hurricanes, and added Account Executive ProServices, or AEPs, to the Texas and Florida markets to support incremental demand. They expect hurricane recovery to begin in the fourth quarter and extend into 2018. They expect the magnitude and benefit to have more impact in Texas than in Florida.
 
Lowe’s donated more than $2.5 million in disaster relief after Hurricanes Harvey and Irma, part in cash and part in product donations.
 
They’ve seen great customer response to MyLowes since they expanded the benefits of the program. They have 1.5 million new memberships. MyLowes customers typically spend 15% more than other customers.
 
They increased the number of associate hours over the quarter and will continue to optimize labor allocation to make sure staff is available to respond to customers when they are needed and improve traffic conversion. They are taking several actions to drive better conversions, and have been able to start tracking traffic inside the stores.
 
They are working to improve the productivity of their supply chain and streamline costs as well as improve fulfillment options for customers. They are working to consolidate freight shipments for both imported and domestic freight.
 
They believe the partnership between Stanley Black & Decker and Lowe’s that will see the introduction of Craftsman products in stores and online in the second half of 2018 will bring a wide range of innovative products into all of their channels.
 
Inventory turnover was 3.94, an increase of five basis points over the third quarter of last year.
 
They are now able to narrow their delivery windows for Pros to a two-hour time frame. Pros currently account for about 30% of their business.
 
They are seeing really strong Pro results in Canada, given their higher mix of the Pro across their different banners, including those stores specifically focused on the Pro in both Quebec and western Canada.
 
Other News:
 
Lowe’s will expand their smart home product offering into 70 U.S. stores after a pilot in three California stores was successful. Lowe’s partnered with San Francisco-based b8ta to create a “curated selection” of more than 60 smart home products, including security systems, thermostats, cameras, lighting and speakers. Lowe’s will also be able to capture information on how customers are interacting with the displays and adjust product content accordingly. What’s called The SmartSpot section is located near the front of the 70 stores. Customers can view product details and pricing on iPads and use smartphones to test out products.
 
Lowe’s will add about 400 new jobs in the greater Charlotte region as they add staff for both estimating and coordinating installations. Lowe’s added 300 positions to the central production office in Wilkesboro earlier this year.
 
Walmart
Q3 sales rose 4.2% to $123.18 billion, exceeding analysts’ expectations. Comp store sales excluding fuel rose 2.7% in the U.S., the biggest gain since the first quarter of 2009. Customer counts rose 1.5%, and Walmart reported that shoppers added one extra item to their carts. Ecommerce sales grew 50%. Walmart said that U.S. online sales should be about $11.5 billion this year and global ecommerce sales should be $17.5 billion. While growth is impressive, that still accounts for less than 4% of Walmart’s overall sales.
 
Walmart’s holiday strategies include having more helpers positioned throughout stores to assist shoppers, offering 165,000 product demonstrations and throwing themed holiday “parties.” Walmart is offering more hours to current employees rather than hiring seasonal workers for Christmas. Walmart is offering discounts on items if customers order them online and then pick them up in store.
 
Walmart has tripled the number of items available online for the holidays to 60 million items, and will provide free two-day shipping on more than 2 million products when the order size exceeds $35. Stores and the website will also offer more exclusive products from brand name companies such as Cuisinart and Bose.
 
Walmart has implemented some unusual strategies to help trim expenses, including producing slightly smaller shopping bags, which saved $20 million, and shortening the length of its receipts, which will save $7 million. Walmart has also added express lanes to their pharmacy, financial services and returns departments. Walmart is also working at negotiating better terms with suppliers.
 
Walmart has also introduced a dual pricing strategy for online and instore which some analysts described as “interesting” and others called “wildly contrarian.” Walmart’s real objective is to drive traffic to stores. Along those lines, they are now showing both the online and instore price for products when they differ. For instance, a box of mac ‘n cheese was $1.48 online and $1.28 in stores. Customers who order online but pick up in store will pay the lower price.
 
Sears 
Sears is reportedly getting tough terms from suppliers for the holidays, with some suppliers stopping shipments and others adjusting payment terms. Sears reportedly is paying cash up front to guarantee shipments from LG Electronics and Samsung. Credit analysts say that Sears needs to raise about $1.5 billion a year to fund operations, but still has assets it can sell to keep afloat. Chairman Eddie Lampert reportedly still believes Sears can become a viable company. He only goes to Sears’ headquarters in Illinois a few times a year; instead, execs visit him at his $42 million estate on Florida’s exclusive Indian Creek Island.
 
MarketWatch reports that Sears is losing share in key categories including appliances, tools and outdoor products. They expect The Home Depot to capture the biggest share of the business Sears is losing.
 
Ace Hardware
Q3 revenue rose 9.1% to $1.34 billion and comp store sales rose 7.1%. Total wholesale revenues rose 9.0% to $1.28 billion. Sales rose across all departments, with outdoor living and lawn and garden posting the largest gains. Ace added 43 new domestic stores in the third quarter and cancelled 34 stores, leaving the co-op’s domestic store count at 4,366 at the end of the quarter, up 31 stores from Q3 last year. According to CEO John Venhuizen hurricane-related activity accounted for 18% of third quarter revenue growth.
 
Westlake Ace Hardware is acquiring seven stores from Buikema’s Ace Hardware in the Illinois and Chicago area. The deal is expected to close in early January.
 
The Chicago Tribune named Ace Hardware a 2017 Top Workplaces. The prestigious award ranks Ace No. 5 among all large companies to work for in Chicagoland. Surveyed team members at Ace Hardware scored their employer especially high across all areas of satisfaction, and rated the connection they feel with their employer 18% above the industry average. The survey is administered by Energage LLC, a leading research firm that specializes in organizational health and workplace improvement. Energage says that their research consistently shows that what is most important to employees is a strong belief in where the organization is headed, how it’s going to get there and the feeling that everyone is in it together.
 
True Value
Gross billings of $492.2 billion and revenue of $364.4 million for the third quarter were relatively flat compared to Q3 last year. Comp sales rose 3.3% for the quarter and 4.2% at Destination True Value (DTV) stores. Sales increased in eight of the nine product categories, led by Hardware, Lumber & Building Materials, followed by Hand & Power Tools.
 
W. W. Grainger
At their annual analysts’ meeting, CEO DG Macpherson told attendees that accelerating growth with large and medium customers in the U.S. remains their top priority. For the full year of 2017 Grainger reiterated their sales guidance of 1.5% to 2.5% growth. For the full year 2018, Grainger forecasts sales growth of 3% to 7%.
 
Amazon
Amazon has started subsidizing the prices of select items sold on its site by third-party sellers. Sellers will still be paid the asking price for their items; Amazon will cover the difference. On Amazon’s seller central, some businesses have voiced concerns that applying discounts to their goods devalues their products and causes consumers to buy from Amazon rather than from the manufacturer directly. Amazon is not allowing companies to opt out of the new discounts.
 
Some analysts who focus on the retail industry think that Amazon is testing the merits of owning a brick and mortar retailer by creating 1,000-square-foot zones at 10 Kohl’s stores. Kohl’s has more than 1,100 stores in 49 states.
 
Amazon is installing package rooms in some of the country’s largest apartment complexes that altogether represent more than 850,000 units across the U.S. Many of the Amazon locker systems are expected to be installed before the peak of the holiday shopping season. The lockers are designed to prevent lobbies and mail rooms from being overrun with packages and secure packages so residents can pick up items after hours.
 
Amazon opened an instant pick up and return center in San Jose, California a few blocks from San Jose State University. Anyone can use the facility to pick up or return packages. Orders made before noon by Amazon Prime customers can be picked up at the center later that day, with free Prime shipping.
 
Amazon will be rolling out Amazon-branded pop-up stores inside Whole Foods markets by the end of the year. The pop-up stores will let shoppers demo Amazon devices, including Amazon Echo, Echo Dot, Fire TV and tablets and Kindle e-readers.
 
Interpublic Group beat out Publicis Group to retain Amazon’s $1 billion+ of global media planning and buying. Amazon launched a review of the business over the summer. IPG first won the business in 2013.
 
The Information reports that Amazon Web Services plans an AI push with the “Ironman” project. The code-named project offers an AI-focused upgrade to AWS’ “data warehouse” service that collects data from various points in the company then stores all the data in one spot.  AWS also wants to make it easier for clients to use the open-source deep learning framework TensorFlow, which Google created. TensorFlow helps with image recognition, speech recognition and other processes driving the AI industry. AWS brought in $4.58 billion in the most recent quarter and stands far ahead of the competition in market share. 
 
A recent survey of 1,000 Amazon Prime members showed that 75% of them intended to renew their memberships. While that seems like a solid number, Costco has a membership renewal rate of 90%. However, analysts say that Amazon Prime’s renewal rate is probably higher, as Prime members are enrolled in autopay.
 
Dallas-Fort Worth is at the top of the list of prospective sites for Amazon’s new HQ2, according to an in-depth analysis by The Wall Street Journal. Dallas-Fort Worth is followed by Boston, Atlanta, Washington D.C. and Chicago.

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