Distribution December 2019

Retail Sales Rise 0.3%
Retail sales rose 0.3% in October after dropping 0.3% in September, according to the latest figures from the Commerce Department. Core retail sales, which exclude food services, car dealers, gasoline stations and building materials stores, were also up 0.3%; core retail sales for September were revised to show they declined 0.1%. Core retail sales correspond most closely with the consumer spending component of GDP. The Fed attributed much of September’s decline to the strike at General Motors that began September 16, but the strike was not resolved until the end of October, and analysts say the pullback pointed to a broader slowdown in manufacturing across the US and global trade tensions. While the October rebound was not robust, it restored faith that consumer spending would hold up through the holidays. Sales at US nonstore retailers, which are mostly online purchases, rose 0.9% from September and were up 14.3% from October 2018.
 
Holiday Sales Recap
The National Retail Federation said a record 190 million consumers shopped from Thanksgiving Day through Cyber Monday this year, an increase of 14% from 2018. About 124 million shopped in stores, 142 million shopped online and about 75.5 million did both. Shoppers spent an average of $361.90 on holiday items over the five days, up 16%. The biggest spenders were 25-35-year-olds at $440.46. NRF says that with the condensed holiday season, shoppers are feeling under pressure to get their shopping done. Sales from smartphones accounted for 36% of online sales, up from 24% last year. However, big storms throughout much of the country snarled both land and air traffic, and retailers are having a tough time fulfilling their promises of one and two-day delivery.
 
The Home Depot
Q3 revenue rose 3.5% to $27.22 billion, slightly below expectations. Comp sales rose 3.6%, below expectations of a 4.7% increase. Comp sales in the US were up 3.8% and were negatively affected by the timing of Black Friday last year. THD cut their forecast for fiscal 2019, and now expects sales to rise 1.8% compared to the prior forecast of a 2.3% increase. That forecast implies fiscal revenue of $110.15 billion.
 
CEO Craig Menear said that their heavy investment in growing their online business has taken longer to generate benefits for fiscal 2019 than anticipated. Originally the initiatives were designed to increase sales 6% while keeping operating margins flat.
 
Q3 Conference Call with Analysts:
 
All US divisions as well as Canada and Mexico posted positive comp sales. Online traffic was healthy, conversion is up and sales were up 22% from Q3 2018, with good growth in most categories. More than 50% of online orders are picked up in stores.
 
Comp transactions rose 1.8% overall, and big ticket comp transactions, defined as those over $1,000, which represent approximately 20% of US sales, were up 4.8%. Excluding hurricane-related markets, big ticket comp transactions were up 5.5%.
 
Comp average ticket also increased 1.8%, with increases being driven by customers trading up to new and innovative items. Commodity deflation in lumber and copper trimmed 80 basis points from results. They did not see a lot of variation in sales from region to region.
 
Sales for Pro customers, which represent approximately 45% of overall sales, continue to outpace DIY sales in the US. They are investing in resets, services and a suite of tools to deliver better service to Pros and save them time and money. They saw strong growth in Pro-heavy categories like fasteners, pneumatics, concrete and installation.
 
Their B2B website for the 780,000 Pros signed up is coming along very well but there is still functionality that needs to be completed before all the enhancements for larger Pro customers can be turned on.
 
They are continuing to rollout automated lockers; approximately 1,300 stores now have pickup lockers for online orders. Approximately 95% of customers rating their experience picking up orders from their locker give it five out of five stars.
 
There was strength across most departments with Tools above company average. They are proud that they are Makita’s exclusive big-box partner and will be rolling out more products in Makita’s 18-volt outdoor line.
More than 60% of US stores now have a new look and feel and customer response has been very positive. Customer service scores in the category of neat and clean have increased 120 basis points from last year and scores for satisfaction with check-out times have increased more than 280 basis points from last year. 
 
It was new CFO Richard McPhail’s first conference call with analysts.
 
At the end of the third quarter they had an ending store count of 2,290 and total sales per square foot of $449, up 3.5% from last year. Inventory turns were 5x, down from 5.2x last year, reflecting a load-in of inventory in support of their strategic initiatives.
 
They have seen shrink increase and are implementing both
 in-store and technology measures in high-risk stores. They are also working on long-term initiatives to address this issue.
 
Market growth overall has moderated over the past year, and while overall growth may be below the average of 4% they built into their plans, the overall market is about $600 billion; they have about a 17% share. Third-party data indicates that they took significant share in Q3, so they believe this means they have an opportunity to grow going forward regardless of overall market growth as long as they stay focused on the customer and continue to drive the business.
 
They are sticking to their plan of delivering great every day value even though there is an increase in promotional activity in the market overall.
 
They believe the impact of tariffs is manageable. Their finance teams, merchants and data analytics teams have really drilled into the overall impact on the business and they know down to the SKU level the point of origin, the classification of the tariff and the potential impact. They work with their supplier partners to mitigate the impact and maintain unit growth. They will work on mitigating the tariff impact by changing country of origin, makeup of the product itself and adding other features and benefits that can add value to the consumer. So far they have offset well over half of the actual SKU impact of tariffs.
 
They will provide more insight into their plans for 2020 at their Investor Conference in December.
Other News:
 
Jennifer McKeehan, vice president, supply chain for THD is one of the 40 Under Forty honored this year by the Atlanta Business Chronicle.
 
Lowe’s
Q3 sales fell 0.2% to $17.4 billion as comparable sales growth of 2.2% overall and 3.0% in the US was offset by the impact of previous store closures and the exit of Orchard Supply Hardware. They maintained their guidance for the year and expect total sales to rise 2.0% and comp sales to rise 3.0%.
 
Q3 Conference Call with Analysts:
 
Total average ticket grew 3.6% to $78.71. This was partially offset by a 3.7% decline in total transactions. Traffic was up both instore and online, but transactions and conversions were down. Consumer project demand is strong and average ticket over $500 was up 4.0%.
 
Consolidated comp sales were driven by an average ticket increase of 2.4% partially offset by a slight comp transaction decrease of 0.1%. US comp sales growth of 3% was driven by an average ticket increase of 2.7% and a comp transaction increase of 0.2%.
 
For fiscal 2020, Lowe’s expects total sales to rise 4.0% and comp sales to increase 2.5%. They also plan to add eight home improvement stores.
 
They feel as if they are on track despite an under performing ecommerce business, marketplace uncertainties and tariff problems.
 
Tools and seven other categories delivered above average comps. US comps rose despite low single digit online growth and higher than expected lumber deflation.
 
All three US divisions and all 15 US geographic regions generated positive comps. Four of their top five performing geographic regions were in the western division, driven by strength in Pro categories as well as appliances and outdoor, improved in-stock and better customer service.
 
Sales in Canada were disappointing and Canada produced negative comps that were below expectations and pressured overall comps. They will be taking several steps in Canada to improve their long-term results.
 
Their focus on Pros is paying off, with Pro comps significantly outpacing DIY comps. Their investment in job lot quantities, department supervisors and an improved in-store experience contributed to sales growth as well as a 700 basis points improvement in their Pro customer service scores in the third quarter.
 
Tools led the merchandising department growth with the strong response to Craftsman continuing to drive market share gains within key Tools categories. Key programs in power tools are also driving growth.
 
Tools had a lot of activity during the quarter. They launched an exclusive line of DeWalt 12-volt compact tools and introduced new and innovative products from Bosch, Spider and Metabo HPT as well as their exclusive Kobalt line of tools.
 
Their ecommerce business is “under repair,” delivering comp growth of just 3%, so essentially contributing nothing to overall sales growth. They underestimated the amount of work that needed to be done. They know how to repair their gaps and have a detailed road map, but it will take time and sequencing. They expect online growth to accelerate in the second half of 2020.
 
Their ecommerce platform is a decade old; they are re-platforming the entire site to Google Cloud to provide much-needed stability.
 
They are working to separate freight from product costs to improve price perception versus the competition.
 
They are also improving ecommerce systems and processes so they can quickly add SKUs and vendors who drop-ship so they can expand their online assortment.
 
They are building capabilities to ship certain SKUs requiring special handling so they can sell basic home improvement items like lithium-ion batteries, cleaning supplies and fire extinguishers online.
 
They are working to improve their customers’ experience on the website, including simplifying search and navigation, one-click checkout and the ability to schedule a delivery.
 
They are investing $1.7 billion over the next five years to improve their omnichannel supply chain.
 
They are continuing to work on improving category management and cross-merchandising.
 
They will be expanding their brand message and promotions with the NFL through their exclusive partnership.
 
They’ve been adding functionality to the smartphones they issued to associates in the stores earlier in the year by adding new applications that make it easier to update prices in the aisles and allow virtually any associate to do it.
 
Their investment in technology and store processes is definitely paying off. Their new labor scheduling system and switch to a centralized One Task team now overseeing more than 1,000 stores are ensuring they serve customers better and maximize their payroll dollars.
 
They are pleased with Pro performance and are now transitioning from retail fundamentals to more strategic initiatives that will grow sales and deepen relationships.
 
They launched a pilot for their Pro loyalty program during the quarter; early results have exceeded expectations in test markets. They plan to launch their Pro loyalty program nationally in the first half of 2020 as part of a whole program aimed at Pros.
 
During Q4 they plan to improve the in-store Pro experience with the roll-out of dedicated point of sale terminals at the Pro desk and their first dedicated Black November event for Pros with traffic-driving offers that show Pros how important they are to Lowe’s.
 
Walmart
Q3 revenues rose 2.5% to $127.99 billion and comp sales rose 3.2%, the 21st consecutive quarter comp sales have risen. Grocery accounts for more than half of Walmart’s US sales.
 
Ecommerce sales were up 41% from Q3 last year, given a boost by Walmart’s expansion of grocery delivery services. Walmart has targeted 35% online sales growth for the full year.
 
Walmart now has more than 3,000 locations for grocery pickup and more than 1,400 that offer grocery delivery. Results were viewed as very solid despite a decline in operating income because Walmart has been investing in online delivery. Analysts are speculating Walmart will reconsider the monthly charge for their InHome Delivery service, currently $12.95 per month, as Amazon just eliminated their $14.99 monthly fee for Amazon Prime members.
 
Walmart has been implementing changes to improve sustainability, including installing 120 electric car stations at stores, and plans to make shopping carts more sustainable by having their shopping cart producer, Unarco, who has produced 3.4 million carts for Walmart, use a patented process of remanufacturing that essentially recycles old shopping carts.
 
Sears
By February 2020 there will be just 182 Sears and Kmart stores left in business, down from 425 locations as of February 2019. Just five years ago there were nearly 2,000 stores in operation. This latest round of closings is in addition to the 100 stores that will close by the end of the year and the 26 stores that closed this fall. Sears is now owned by a new entity called Transformco, owned by Eddie Lampert, who was Sears Holding’s largest creditor and shareholder, and who purchased the strongest Sears and Kmart locations in a bankruptcy auction in February for $5.3 billion. An affiliate of Transformco recently bought roughly 400 Sears Hometown stores.
 
Sears launched Sears Plus, a new program that offers members a wide range of benefits, including 20% off clothing, free tire repair, free delivery and haul-away of appliances and mattresses, cash rebates on major appliances and heating and cooling systems and maintenance and steep discounts on other car, plumbing and appliance services. The program launched in late October in select markets and will roll out nationally in the coming months, according to Sears.
 
Menards
Menards is expanding their Midwest range and now has 20 locations in Ohio, with a new store planned that is expected to draw customers from both Southern Ohio and West Virginia. Menards operates about 20 stores in Ohio now, and a total of more than 300 locations in 14 states. They are also planning to expand in Pennsylvania. 
 
Ace Hardware
Q3 revenue rose 7.2% to $1.53 billion, a new company record. Comp sales rose 3.2% and average ticket rose 2.4%. Comp transactions were up 1%. Total wholesale revenues rose 4.7% to $1.4 billion. Online sales rose 81%, driving the overall increase in revenue.
 
Ace held their first-ever in-store scavenger hunt from November 17 through the close of Small Business Saturday, the day after Black Friday. Consumers went to Ace stores to take photos of an item from The Grommet and share the photo on Twitter or Facebook. The social share entered consumers into the national sweepstakes to win a grand prize from The Grommet at Ace, gift packs with a selection of the Grommet at Ace best sellers and Ace Hardware gift cards. In addition, to celebrate Ace’s 95th birthday and embrace the spirit of giving, Ace donated 95 cents to the Children’s Miracle Network Hospitals for every eligible sweepstakes entry.
 
True Value
True Value ranked number one on Newsweek’s 2020 list of America’s Best Customer Service Brands in the Home Improvement Stores category. Winners were selected based on an independent survey of more than 20,000 US customers who have either made purchases, used services or gathered information about products or services in the past three years. Customers were asked whether they would recommend brands to friends or family, and also asked to evaluate based on quality of communication, professional competence, range of services, customer focus and accessibility. A total of more than 115,000 evaluations were collected about retailers and service providers in 160 categories.
 
Amazon
Amazon is expanding their in-store pick-up service, called Counter. Counter was first introduced in the United Kingdom and Italy in spring and then brought to the US in June. Since then Counter has expanded to Kohl’s stores, Stein Mart discount department stores and Rite Aid. Now Amazon is adding GNC, Health Mart and Stage Stores.
The long-time Amazon exec who oversaw their expansion into retail stores and was the driving force behind the Kindle e-reader resigned in November to focus on community service and not-for-profit work. Steve Kessel has been with Amazon for 20 years; an Amazon spokesperson described Steve as a “customer-obsessed leader who has helped build some of Amazon’s most innovative businesses.”
 
Amazon will invest more than $40 million to construct a robotics innovation hub in Westborough, Massachusetts. The 350,000-square-foot facility will feature corporate offices, research and development labs and manufacturing space and generate 200 full-time jobs.
 
Merchants who sell their products on Amazon’s third-party marketplace can no longer use the US Postal Service’s Priority Mail one-to three-day delivery service unless they purchase the postage from Amazon. According to consultants, the move is part of Amazon’s effort to get merchants to use their Fulfillment by Amazon network, in which Amazon manages customers’ supply chains for a fee. The self-fulfillment service, Seller Fulfilled Prime, allows merchants to choose their own logistics partners and retain their Prime Merchant status as long as they hit one-to two-day delivery targets 98.5% of the times.
 
Amazon lost a $10 billion technology contract with the Department of Defense (DOD) to Microsoft in a contest that many analysts said was influenced by President Donald Trump’s criticism of Amazon.  The contract has wide ranging implications as it is central to the Pentagon’s efforts to modernize technology, and Amazon had been considered the front-runner, partially because they built cloud services for the CIA. Amazon challenges the award and has filed a lawsuit against the DOD in federal court.

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