Distribution December 2022

Retail Sales Rise 1.3%
Retail sales rose 1.3% in October after being flat in September. Retail sales were up 8.3% year over year. Core retail sales, which exclude automobiles, gasoline, building materials and food services, rose 0.7% in October after rising an upwardly revised 0.6% in September. Building materials and garden supply stores were up 1.1%; online sales rose 1.2%. The retail sales report covers about a third of overall consumer spending and doesn't include services, such as travel and entertainment. Core retail sales correspond most closely with the consumer spending component of GDP.
 
The Home Depot 
Q3 sales rose 5.6% to $38.9 billion and comp store sales rose 4.3% overall and 4.5% in the US.
 
Q3 Conference Call with Analysts:
 
All 19 US regions delivered positive comp store sales. Mexico’s comp sales were above company average and Canada’s were below, in local currency. Eleven of fourteen merchandising departments posted positive comps.
 
They believe the long-term underpinnings of demand for home improvement remain strong and think they are well- positioned to leverage their distinct competitive advantages and take advantage of compelling growth opportunities.
 
During the third quarter comp average ticket increased 8.8% and comp transactions decreased 4.4%. The growth in comp average ticket was driven primarily by inflation across product categories as well as demand for new and innovative products.
 
Pro sales continue to outpace DIY sales. They’re encouraged by the continued momentum they are seeing with both Pro and DIY customers. In addition, Pros tell them their backlogs remain strong. They continue to see momentum with larger Pro customers who continue to post strong double-digit comps.
 
During the quarter, their project business remained healthy. They saw double-digit comp performance in building materials, plumbing, lumber and new work departments as well as in other categories like fencing, siding, conduit boxes and fittings, hubs and showers and cabinets. 
 
They now have 100% of their appliance delivery volume managed through their market delivery operations, which has greatly improved the customer experience. On-time and complete deliveries have increased and customer satisfaction metrics have gone up 6% over third quarter last year. 
 
Online sales leveraging their digital platforms increased nearly 10% compared to the third quarter of last year. Approximately  50% of their online orders were fulfilled through their stores.
 
They’re excited about the holiday season. Their Halloween event set records both in-store and online, as customers continue to add to their Halloween décor collection with the unique and exclusive items they offer.
 
Their holiday gift center will focus on brands that customers want, including Ryobi, Makita, DeWalt and Ridgid.
 
They did see some deceleration in certain products and categories, although it is hard to know what is behind that. The customer could be pulling back in general, it could be a reaction to price inflation, there could be categories that people overbought during the pandemic or people could be moving on to other projects.
 
Homes have appreciated 40% over the last 3 years. Year-over-year home prices are up 13%. Since last December, home prices are up 8%, so appreciation is definitely slowing down. If there is a correction at all, most experts predict it will be a modest adjustment. They do not know if that would be meaningful enough to affect spending behavior.
 
No one is expecting anything like the massive drop in home prices seen in the 2008 housing crash when nearly 25% of homeowners were underwater.
 
Of owner-occupied households in the US, 40% are owned outright, with no mortgage. Of the 60% that do have a mortgage, 90% of those mortgages are fixed rate, 73% of those mortgages are fixed at a rate below 4%. They are seeing people choose to stay in place and improve their home. That’s what their customers are telling them, and that's what the Pros report their customers tell them.
 
Transactions have declined for six consecutive quarters because they are lapping the tremendous activity driven by the pandemic. In addition, all retailers were dealing with supply chain issues that impacted what was on the shelf, commodity inflation, etc.
 
In Q3, inventory grew 27% year over year. In Q2, they grew their inventory 38% year over year. They typically build inventory from Q2 to Q3. This year their inventory actually came down by $400 million from Q2 to Q3. They believe their inventory position is very healthy.
 
THD confirmed full-year guidance of comp sales gains of about  3%.
 
Other News:
 
The Home Depot partnered with influencers to make over a vacation rental in the Berkshires.  Holly and Brad Lauritzen (Our Faux Farmhouse), Fariha Nasir (Pennies for a Fortune) and Danielle Guerrero (Our Nest on Powell) were tasked with
re-imagining the entrance, patio, kitchen, living areas and guest rooms within the rental home. Using only products found at The Home Depot or HomeDepot.com, the influencers created designs to exemplify current trends throughout the Berkshires property, including vintage-inspired wallpaper and lighting blended with contemporary furniture. Paint and textiles were used to further update the home. They also focused on using products that were functional and comfortable as well as beautiful and met the needs of guests. Adding these types of upgrades enhanced the guest experience and helped homeowners maximize the return on their investment properties. As a part of the home transformation, The Home Depot will make in-kind donations of unused furniture, décor and housewares items to nonprofit organizations including Habitat for Humanity, House2Home, Safe Haven Family Shelter and Oasis Center.
 
Lowe’s
Q3 sales were $23.5 billion with comparable sales up 2.2%overall and 3% in the US. Comparable average ticket increased 8%, driven by product inflation, 80 basis points of commodity inflation and higher Pro sales.
 
Q3 Conference Call with Analysts:
 
Sales in Canada were down 10.2% in USD, with roughly half of the decline attributable to a stronger dollar. Pro sales were up 16% in the quarter, driven by broad-based strength across all categories. DIY sales trends improved.
 
They’re awarding $200 million in bonuses to frontline hourly associates ahead of the holiday season in recognition of the tremendous job they have done.
 
Their Pro business grew 16% and 36% on a two-year basis, the tenth consecutive quarter of double-digit Pro growth. They are building on their greatly improved Pro product and service offerings with their new MVP Pro Rewards and partnership program and their enhanced Pro CRM. Pros remain optimistic, with over 70% saying that they expect even more work in 2023 than they had in 2022.
 
Lowes.com sales grew 12%, more than four times their overall US sales growth, representing a sales penetration of 10%.
 
The rollout of their market delivery model for big and bulky products is going well. Eight geographic regions covering more than half of their stores are now converted to the new model. They are on track to complete the rollout by the end of next year.
 
Their expanded coastal holding facility network is opening up capacity for them to hold product upstream from their distribution centers.
 
Sales are holding up well. Even in markets where home prices have declined after a steep run-up during the pandemic, they are not seeing any negative impact on sales.
 
They feel good about the long-term housing market. The average age of homes in the US is over 40 years old and roughly 3 million more homes built during the housing boom in the mid-2000s will be entering prime remodeling years, which usually means big ticket repairs will be needed.
 
This is one of the key reasons why two-thirds of home improvement spending is nondiscretionary; it’s spent on repair or maintenance projects that cannot be delayed. In addition, there is a persistent under-supply of homes and 250,000 first-time millennial homebuyers are expected to enter the market every year through 2025.
 
They had a strong sell-through in Halloween with an early sell-out of a 12-foot lighted animated mummy at a price point over $300, a good example of strong discretionary spending. Halloween in general is a highly discretionary category, and the success is a further indication of the strength of the consumer.
 
They  kicked off the holiday season with trim and tree sets early in the quarter and are seeing early sell-through on taller, higher-end artificial Christmas trees, which is another example of both discretionary purchasing and consumers trading up.
 
They have been transforming their disaster response capabilities over the past few years which has dramatically impacted their ability to support communities through devastating storms like Hurricane Ian. Year round, Lowe's now has a cross-functional command center dedicated to supporting disaster response efforts, which also allowed them to respond effectively and quickly to the pandemic
 
They now offer same-day delivery nationwide with more than 1,700 stores supported by Instacart. This partnership allows them to deliver over 30,000 items stocked in stores that weigh up to 60 pounds. In the days leading up to Hurricane Ian they  received thousands of same-day orders as customers prepared for the storm. They are also on track to meet their goal of decreasing shipping times by 50%.
 
They recently asked all of their regional vice presidents to find Pros who do not want to sign up for their loyalty program so they could talk to them and better understand why. However, they discovered that once Pros understand the benefits of their program they were eager to join, so they haven’t been able to do many interviews. Instead they are focusing on increasing awareness of the benefits and making sure their execution lives up to their promises.
 
Regarding their recent announcement to sell their Canadian operations to Sycamore Partners, Ellison said that they would have had to make significant investments in Canada to bring the business up to parity with the US business and decided that money could be better spent maximizing the enormous opportunities they have in the US.
 
They raised their earning guidance but not their overall sales guidance and expect 2022 sales of approximately $97  to $98 billion, representing comp sales of flat to a decline of 1% compared to 2021. They expect Q4 comp sales to be slightly positive and expect continued strong Pro performance and steady DIY trends.
 
Other News:
 
Lowe's is partnering with German high-end appliance manufacturer Miele and will be the exclusive home center retailer for three Miele dishwashers, two front-loading washers and one dryer. The Miele app allows consumers to operate their appliances remotely.
 
Walmart
Q3 revenue rose 8.7% to $152.8 billion, beating expectations.  Comp sales rose 8.2% year over year, almost double expectations of 4.3% growth. The growth was led by market-share gains in their grocery business.
 
 
Ace Hardware
Q3 revenues rose 10% to a record $2.2 billion. Net income was $100.6 million for the third quarter of 2022, an increase of $1.3 million from the third quarter of 2021. The approximately 3,600 Ace retailers who share daily sales data reported a 5.8% increase in US comp sales for Q3. Estimated retail inflation of 11.2% helped drive the 9.5% increase in average ticket. Comp transactions were down 3.4%.
 
Total retail revenues for the quarter rose 2.3% to $193.4 million. Ace added 35 new domestic stores in the third quarter and cancelled 10 stores. Ace ended the third quarter with 4,841 domestic stores, an increase of 82 stores from the third quarter of 2021.
 
Ace Hardware has already opened 130 new stores in 2022  and is planning to open at least an additional 40 stores in Q4. That will result in a total of more than 170 new stores by the end of the year. Ace operates more than 5,600 locally-owned hardware stores in all 50 states and 65 countries, with global sales topping $20 billion.
 
Amazon
Amazon Personalize enables developers to improve customer engagement through personalized product and content recommendations and also personalize their websites, apps, ads, email and more, using the same machine learning technology used by Amazon. Amazon says that no machine learning experience is required to get started with Amazon Personalize.
 
Amazon hit an unfortunate milestone when they became the  first company ever to lose more than $1 trillion in market value, according to Bloomberg. Amazon’s market value fell to $879 billion in November, down from a high of $1.88 trillion in July 2021. 
 
Amazon is reviewing all of their unprofitable businesses, including the devices unit that houses voice assistant Alexa, as part of broad cost-cutting efforts, according to The Wall Street Journal.  Amazon is closely evaluating its Alexa business and is currently considering whether it should focus on trying to add new capabilities to the voice assistant, which is available on a variety of Amazon devices. Adding capabilities would require greater investment, and many customers use the device for only a few functions, according to the report. The unit that houses Alexa has posted an operating loss of more than $5 billion a year, according to WSJ.
 
Following a months-long review, Amazon told employees in some unprofitable units to look for jobs elsewhere in the company, while moving to redeploy staff from certain teams to more profitable areas and closing teams in areas such as robotics and retail.
 
Amazon plans to lay off as many as 10,000 workers across many divisions, including devices, retail, and human resources, according to The New York Times.  Many tech companies are laying off employees now that the pandemic-era tech boom is cooling off and labor costs are still increasing.
 
Amazon founder Jeff Bezos urged Americans to wait on making big-ticket purchases ahead of the holiday shopping season amid growing concerns of a possible economic recession during an interview with CNN.
 
Bezos told CNN that he plans to donate most of his $124 billion lifetime wealth to combat the climate crisis and to fight deep social and political divisions in the world. He did not provided details on how he plans to employ his fortune in pursuit of the goals he has set for himself.
 
Jeff Bezos announced Dolly Parton is the winner of this year’s Bezos Courage and Civility Award, which recognizes leaders who “courageously seek solutions.” Parton, whose own fortune is estimated at $375 million, was awarded $100 million to use as she sees fit, according to Forbes. Parton is known for her philanthropic actions and said that the money donated by Bezos will go to charitable causes she supports, including children’s literacy.

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