Retail Sales Fall 0.1%
Retail sales fell 0.1% in October after rising an upwardly revised 0.9% in September, according to the Commerce Department. The modest decrease came after six consecutive monthly increases in spending and was less than expected. Retail sales were up 3.8% year over year. Excluding automobiles, gasoline, building materials and food services, retail sales rose 0.2% in October after rising an upwardly revised 0.7% in September. Core retail sales, which are mostly goods and not adjusted for inflation, correspond most closely with the consumer spending component of GDP. The retail sales report covers about a third of overall consumer spending and doesn't include services, such as travel and entertainment.
The Home Depot
Q3 sales fell 3% to $37.7 billion and comp sales fell 3.1%. Results were better than analysts expected, but in line with THD’s expectations. In local currency, Mexico and Canada posted comps above the company average.
Q3 Conference Call with Analysts:
Customers are still doing small projects, but big-ticket discretionary items are under pressure.
Pro outperformed DIY again, but normalized for commodity impact, Pro comp sales were flat for the quarter. Pro backlogs are shrinking but are still healthy and remain elevated compared to historical norms.
They are investing in multiple initiatives focused on growing the Pro business, which represents $475 billion in addressable market. Because their current share of this market is low, they have an enormous opportunity to grow.
They are also focused on building their capabilities to serve the complex Pro. This customer is accustomed to interacting with their suppliers in a different way than THD’s traditional business model. Pros working on complex projects want to reserve product, use trade credit and have products delivered to their job site in a staged manner. These capabilities exist in the market today, but they are incorporating them in their full ecosystem to serve Pro customers in a way no one else can.
They are evolving their organizational structure to better align outside sales and service businesses, and recently promoted Ann-Marie Campbell to Senior Executive Vice President. This organizational change will help them better serve Pros by maximizing expertise, product assortment, fulfilment and operations.
Having the right products in stock in the right quantity and on the shelf available (OSA) for purchase is critical. They have implemented several initiatives to do this more effectively and efficiently. Inventory positions are better and in-stock is much improved due to their focus on improving OSA.
They are focusing on Get Stores Right (GSR). GSR drives productivity by using their proprietary space allocation model coupled with their tenured field merchandising teams to determine which categories to invest in on a store-by-store basis.
Big-ticket comp transactions (those over $1,000) were down 5.2% compared to the third quarter of last year. Spending in big-ticket discretionary categories like flooring, countertops and cabinets continues to soften. But they saw big ticket strength in Pro-heavy categories like roofing, insulation and portable power. They prefer comp sales equally balanced between transactions and average ticket.
Sales leveraging digital platforms increased approximately 5% compared to the third quarter of last year. They continue to invest in the digital experience across their website and app. Approximately half of online orders in Q3 were fulfilled through their stores.
They released a variety of digital enhancements in the third quarter, ranging from simple improvements to help customers track orders to more complex things like updating their search and recommendation algorithms.
They will continue to focus on having a broad assortment of best-in-class products that are in stock and available for customers when they need them. They will also continue to lean into products that simplify the project and save customers time and money.
Analysts noted that retailers are seeing a return to pre-Covid purchasing patterns where there is more purchasing activity on weekends and around holidays and events and bigger lulls in activity in between; THD responded that they had not seen that in their business, but their promotional activity has returned to pre-Covid levels and the overall environment has stabilized. They will continue to focus on EDLP (everyday low prices).
They narrowed their guidance for the year and now expect fiscal 2023 sales and comp sales to decline between 3% and 4%. They are targeting an operating margin between 14.2% and 14.1% for the year.
They declined to talk about guidance for 2024, preferring to wait and see what the Fed does regarding interest rates and how the economy performs. However, they believe the worst of the inflationary environment is behind them.
Analysts noted that THD has a reputation for under-promising and overdelivering.
THD will buy building materials manufacturer International Designs Group, the parent company of Illinois-based Construction Resources Holdings (CRH). CRH is a distributor of design-oriented surfaces, appliances and architectural specialty products for professional contractors focused on residential and multi-family home building renovation and remodeling. The deal is expected to close by the end of the year; terms were not disclosed. The acquisition is part of THD’s commitment to capture a larger share of the Pro contractor market.
Q3 sales fell to $20.5 billion from $23.5 billion in Q3 2022. Comp sales fell 7.4%.
Lowe’s cut their full-year forecast and now expects $86 billion in sales, down from their previous forecast of $87 to $89 billion. They’re also forecasting a 5% decline in comp sales, up from their previous forecast of a 2% to 4% drop.
Q3 Conference Call with Analysts:
At Lowe's, 75% of revenue is driven by DIY customers and 25% by Pros while the broader market mix is roughly 50% DIY and 50% Pro. As a result, whenever the DIY customer becomes cautious, it disproportionately affects them. DIY demand softened in the third quarter, while Pro comp sales were positive.
Comp sales were down 7.4% as the slowdown in DIY bigger ticket spending offset growth in Pro. Q3 comps were negatively impacted by approximately 50 basis points due to lumber deflation. Comp transactions declined 6.9%, driven by softer demand in DIY discretionary projects, partly offset by positive comp transactions in Pro.
Comparable average ticket was down 0.5%, driven by lumber deflation, more normalized appliance promotions and a decline in big-ticket DIY transactions. However, average ticket still increased in the majority of merchandise categories.
They saw increased pressure on big-ticket categories where they have strong penetration, such as appliances, flooring, kitchen and bath. Consumers are postponing purchases or scaling back. For example, customers who may have previously bought an entire kitchen suite may now just buy a refrigerator.
The industry-wide pullback in appliance sales has a larger impact on Lowe's since they are the market leader in appliances in the US, with 14% of sales coming from appliances. They have made adjustments to make sure they can go after the 100,000-plus appliances that break in the United States every week.
Pros are still working. Many of their projects are due to increased wear and tear on aging homes. These unavoidable repairs continue to create project backlogs for small to medium-sized Pros, their core customers. In their most recent survey, nearly 70% of Pros reported healthy project backlogs but due to the overall economic uncertainty are feeling a little less confident.
Online sales declined 4% in the quarter as the same pressures in DIY bigger ticket categories impacted digital sales. They have started offering Apple Pay to make it easier for people to buy online.
They are leveraging the newly developed capabilities they’ve been working on for several years to improve productivity, reduce costs and improve the customer experience. So despite the drop in sales, operating margins improved.
They opened 15 Lowe's Outlet stores in Q3. These smaller-format stores are located in areas with lower-cost real estate. Stores are close to core customers without cannibalizing nearby Lowe’s stores. The response from value-conscious customers has been outstanding.
The outlet stores offer savings between 25% to 70% off on big and bulky, scratch and dent items like appliances, patio furniture grills, while at the same time maximizing profitability. They will be talking about potential growth opportunities on an upcoming call.
Lowe’s rural strategy is built around a one stop shop concept designed to give customers in rural areas across the country everything they need for their home and farm, including a wide offering of farm, ranch and outdoor products. They launched this rural assortment to more than 300 stores over the summer that are now selling products like livestock feed, pet food, utility vehicles and apparel from brands like Carhart and Wrangler.
The rural stores are their best performing DIY segment. They are performing significantly above company average, with very strong sales in pet, apparel and automotive.
They are now exploring how to expand the rural assortment beyond the original 300 designated rural stores. Customer response to the new assortments and product lines has been so good they are planning to add more merchandise.
Klein Tools was reintroduced to Lowe’s stores during the quarter. Klein is the number one tool brand for electrical and HVAC professionals. They are offering the largest assortment of Klein Tools in the home improvement retail channel. Response by their Pro customers has exceeded expectations and they have plans to expand their brand assortment.
They just introduced Lowe's Lowest Price Guarantee to assure customers they will get the lowest price on items for their home. They are currently offering the lowest prices of the year on select major appliances. They determined their Lowe’s Price Promise was too ambiguous and wanted something that clearly communicated with customers.
They are also offering $100 off for every $800 a customer spends. For Pros, they have tailored exclusive bulk saving offers on appliances as well. They featured more than 10 major appliance door busters to drive traffic on Black Friday.
They are expanding their private brand portfolio to deliver even more great quality and value at a lower price while also driving better margin rate productivity.
They are making a number of enhancements to make holiday shopping more convenient. They’re extending same day delivery to in-store purchases through their gig network that enables them to tap into the OneRail network of 12 million drivers. That will enable them to deliver directly to Pro job sites and customer homes in just a matter of hours. In certain locations they will be delivering live Christmas trees to customers' doors.
They want to push up average ticket and are adding more merchandise right at the checkout with a new design that makes it easy to showcase grab-and-go items. They’re also shifting to an easy-to-use assisted self-checkout with cashiers, who will be right there to answer questions and help customers when they need it.
They are tripling the staging area for buy-online pickup-in-store orders to support increased online sales and create a much faster, easier customer experience.
Their cost management teams are working closely with the merchants and utilizing the tech-enabled tools they’ve invested in. They have very detailed product cost breakdowns that also inform negotiations with suppliers.
Q3 net sales from customer purchases rose 5.3% to $159.44 billion while membership revenue and other income ticked up 1.6% to $1.37 billion. Comp sales excluding fuel increased 4.7% across all US locations, climbing 4.9% at Walmart, but just 3.8% at Sam’s Club, a big drop from a 10% gain in Q3 2022.
WM expects growth to moderate in the fourth quarter as grocery inflation subsides. WM expects net sales growth of 5% to 5.5% for fiscal 2024.
Ace reported Q3 revenue rose 2.5% to a record-setting $2.3 billion, driven by 24% growth in their digital business. The approximately 3,700 Ace retailers who share daily retail sales data reported a 0.7% decrease in US retail comp sales due to a 0.5% decrease in average ticket and a 0.2% drop in comp store transactions. Removing the deflationary impact of lumber stores, US comp store sales were up 0.6% for the quarter.
Amazon is launching a new heavy-duty robot called Titan. Titan can lift up to 2,500 pounds and will be deployed in fulfillment centers to carry heavy and bulky items. Titan joins Amazon’s growing fleet of robotics. Amazon has now launched more than 750,000 robots across their fulfilment centers globally.
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