Distribution June 2017
RETAIL SALES RISE 0.4%
Retail sales rose 0.4% in April after rising an upwardly revised 0.1% in March and were up 4.5% from April 2016. Core retail sales, which exclude auto sales, gas and building materials and factor into GDP, rose 0.2% in April after rising an upwardly revised 0.7% in March. Sales at building material and garden equipment and supplies dealers were up 1.2% after declining 1.7% in March. Sales at non-store retailers, which include internet sales as well as catalog sales, rose a strong 1.4% in April after rising 0.6% in March. Retail sales account for one-third of all consumer spending, with services making up the other two-thirds.
TARGET PAYS RECORD SETTLEMENT IN DATA BREACH
Target agreed to pay $18.5 million to resolve an investigation by state prosecutors into their massive 2013 data hack. It was the largest multistate data breach settlement in history. The money will go to 47 states and the District of Columbia. The Target data breach was followed by several other high-profile beaches including The Home Depot and Neiman Marcus. The breach is credited with being the turning point that alerted American corporations that managing cybersecurity was a priority for the C-suite, not just the IT department.
THE HOME DEPOT
First quarter sales rose 5% to $23.89 billion and comp store sales rose 5.5%. Comp sales at U.S. stores were up 6.0%. The increase in comp sales beat expectations.
Sales of big-ticket items over $900, typically about 20% of sales, rose 15.8%. The number of customer transactions was up 1.6% to 380.8 million and average ticket value rose by about $2 to $62.39.
THD raised their profit forecast for this fiscal year and expects both comp store sales and net sales to rise 4.6%.
From their Q1 Conference Call with Analysts:
All three U.S. divisions posted positive comps, led by the Southern Division. Canada and Mexico also posted positive comps in local currency.
All merchandising departments posted positive comps. Appliances, lumber and flooring were in the double digits, and Tools, including Tool Storage and Power Tools, were above the company average.
Appliances, Flooring and Roofing drove the 15.8% increase in big-ticket sales.
Their new assortment of lithium-ion powered outdoor power tools is being very well received.
Their newly simplified online checkout process reduces customer’s checkout time by an average of 20%. They are also using big data to better know their customers so they can better meet their needs. Their refreshed mobile app personalizes the user’s home page based on location, customer segment and shopping patterns. They are seeing increased conversion rates.
Pro sales grew twice as fast as DIY sales. They are working to strengthen their sales support, assortment and fulfilment for Pros. The Pro business was fairly balanced between big-ticket Pros and small spend Pros.
They continue to see significant opportunity to help Pros manage and grow their business, and connect Pros to do-it-for me customers through their Pro referral program.
Another component of the Pro strategy focuses on MRO customers with Interline. The rollout of Interline’s catalog of products to Home Depot stores is now live in more than 1,500 U.S. stores.
They are investing in interconnected retail and seeing positive response from customers in terms of improved customer satisfaction scores and increased sales. Traffic growth was robust and online sales grew approximately 23%.
The Merchandising Execution Team (MET) reduced merchandising set times by 25%.
They hired more than 85,000 new associates for the busy spring sales season using a simplified application that reduces the time needed to apply by 80%.
They opened two new stores in the U.S. and one in Mexico during the first quarter, bringing their total store count to 2,281 and selling square footage to 238 million square feet.
Total sales per square foot for the first quarter rose 4.6% to $394. End of the quarter merchandise inventories were up $390 million to $13.6 billion. Inventory turns were 4.8 times, flat compared to Q1 last year.
They are expecting currency pressure of about $250 million this year.
Store visits were up 15% year-over-year and their conversion rate increased 30 basis points. 45% of orders placed online are picked up in the store.
They have invested disproportionately to take share in categories where they overlap with key competitors who have been “challenged” in this marketplace, including the appliances, tools, hand tools and storage categories.
They get a 300-page report on how all the great new innovative products are doing every month and they use it to constantly improve what they offer.
There are some categories and segments that they feel will lean more toward the digital world, including products that are smaller cube, more dense and higher value, including faucets and power tools.
They are very pleased with their performance on the private label credit card. Penetration grew year-over-year by 20 basis points and is now 22.6%. Sales on their private label card for Pros outpaced the company average.
Home Depot CFO Carol Tome told TheStreet.com that all of their stores are cash flow positive, and the net present value of operating each store is greater than the net present value of closing the store. She does not have a list of stores that she is worried about.
Q1 sales rose 10.7% To $16.86 billion and comp sales rose 1.9%. Both results were below expectations. Comp sales at U.S. stores rose 2.0%.
From their Q1 Conference Call with Analysts:
Average ticket increased 3.5%, partially offset by a 1.5% decline in transactions that stemmed from weaker outdoor performance. Outdoor typically accounts for 35% of Q1 and 40% of Q2 sales. This year’s spring strategy was designed to balance indoor and outdoor, but in retrospect, they believe they focused too much on indoor.
They posted positive comps in 8 of 11 product categories and 12 of 14 regions. Comps were also above average for in-home sales.
Comp sales grew 27% on lowes.com. They’ve added online scheduling capabilities to their in home services and they’ve seen a very strong response, with increased leads and appointment requests.
Pro customer comps were above average. They continue to focus on adding destination brands to attract Pros and connecting seamlessly with Pros across all channels.
Their acquisition of Maintenance Supply Headquarters is an important step in their strategy to better serve Pro customers. Combined with their November 2016 acquisition of Central Wholesalers their ability to serve the multifamily housing industry as both a primary and secondary supplier is greatly expanded. They also increased their presence in major metro markets. The combined multifamily MRO business is expected to generate more than $400 million in annual sales with 16 distribution centers and more than 200 additional outside sales representatives.
Their acquisition of Canadian chain RONA reached its one-year anniversary in mid-May. They have converted six RONA big box stores to Lowe’s branded stores and improved profitability by leveraging shared supplier relationships.
More than half of the homeowners they surveyed believe that the value of their home will continue to increase and nearly half intend to do a home improvement project in the next six months.
They recognize they have to improve their messaging to the DIY customer and optimize their promotions.
They’re working to drive productivity in their supply chain by introducing new international carriers into their system and balancing volumes against three new shipping alliances in Southeast Asia.
They expect to recover their first quarter sales miss over the next two quarters by increasing volume, improving commercial effectiveness and rebalancing indoor and outdoor. They expect total sales growth of 5% and comp sales growth of 3.5%.
Their credit card penetration for private label has grown steadily to 28%.
They have tried to streamline their organization in order to be more nimble and speed up decision making.
Lowe’s added home monitoring to their Iris security system to enable Lowe’s customers to link their smart home to a professional monitoring system for $14.95 per month. Alarm Tracker is another Iris feature that identifies threats at home, whether it’s security, smoke or carbon monoxide alarms. Iris can also be connected to a Bosch system to ensure that pets don’t set off home security systems.
Lowe’s is buying Maintenance Supply Headquarters, a producer of repair and home improvement tools for the multifamily sector, for approximately $512 million. Lowe’s will also acquire their 13 distribution centers. Maintenance Supply Headquarters, based in Houston, was founded in 2006 and carries more than 5,300 MRO products. They serve customers in the western, southeastern and south- central U.S.
Q1 sales rose 1.4% to $117.54 billion and comp store sales rose 1.4%. Traffic in U.S. stores was up 1.5%. Average ticket edged down 0.1%, reportedly due to lower sales of higher-ticket items at the beginning of the quarter as well as continued price investment (price cutting).
Online sales grew at the fastest clip in at least five years with gross merchandise volume, a measure of all the goods Walmart sells online, rising 69% in the first quarter. Walmart added 15 million items to their website in the quarter, bringing the total number of items available online to 50 million. Walmart also did away with their Amazon Prime-like subscription plan and began offering free shipping for orders of $25 or more and free pick-up in store for any size order.
Walmart online chief Marc Lore says that they are still playing catch-up to Amazon. One example is what he referred to as long-tail categories, which refer to the seemingly endless assortment of products that online retailers can offer compared to the space limitations of physical retailers that force them to offer edited assortments that focus on category best sellers. Lore got his current job after Walmart bought his company, Jet.com, for $3.3 billion last September. Online sales grew 29% over the Christmas holiday quarter, helping the retailer’s same-store sales top estimates.
Walmart opened their 100th training academy in the U.S. and now has academies in 40 states. Since the program launched last year Walmart has expanded the curriculum to cover more than 65 positions. Associates are trained through a combination of classroom and sales floor exercises, utilizing technology including tablet computers and cloud storage for training materials. Walmart plans to have a total of 200 academies opened in all 50 states by the end of the summer. So far more than 52,000 associates have graduated.
The U.S. government has asked Walmart to pay $300 million to settle a five-year investigation into foreign bribery. The settlement offer was made after Walmart had spent nearly $840 million on their own internal investigation and upgrading their compliance operations. Walmart is expected to agree to the offer.
Q1 revenue fell to $4.3 billion from $5.4 billion in 2016 and comp store sales fell 11.9%. The windfall from the Craftsman sale to Stanley Black & Decker helped the retailer turn a profit of $244 million during the quarter.
CEO Eddie Lampert gave a rare interview to the Chicago Tribune in early May, saying that he’s still committed to turning Sears into a 21st century merchant focused on catering to their best customers. He said the turnaround is taking longer than he expected, and complained that media speculation about Sears’ inevitable bankruptcy has made it even tougher for Sears and Kmart to work with suppliers. One reason they have avoided filing for bankruptcy protection is the great human cost of doing so; they are committed to fulfilling their obligations to their retirees and pension beneficiaries, and that comes at a tremendous cost. They have dramatically improved the Sears Shop Your Way program as well as improved the value proposition on their credit card. Lampert said the media’s perception that they are going under has made working with vendors very challenging, and that Sears has as much time to turn the business around as their vendors, lenders and shareholders are willing to give them.
Sears filed suit against One World, a subsidiary of Techtronic Industries that manufactures Craftsman power tools and accessories for Sears. CEO Eddie Lampert explained the actions in a long blog post, saying that they will fight hard to hold One World to honor the agreement Sears has with them. According to Lampert Sears has paid One World more than $868 million since 2007, and has paid and continues to pay all bills as they come due. Lampert says that One World also manufactures power tools for other companies, and by reducing its commitment to Sears, One World can do more business with those other companies. Lampert went on to say that they have purchased more than $13 billion a year in goods and services for Sears and Kmart across their entire vendor base and they have always met their payment obligations and are confident they will continue to do so. Techtronic Industries had no comment on the allegations they had threatened to terminate or substantially alter the agreement they have with Sears.
Sears and one of their tool suppliers, Apex Tools, was found guilty of infringing on the patents of suburban Chicago-based LoggerHead Tools. LoggerHead is a father and son company that sells what they call the Bionic Wrench, a tool that can adjust much the same way pliers adjust but maintains the grip of a wrench. The product sold 10,000 units when it debuted on QVC and was reportedly a hot seller at both Sears and Ace Hardware. Sears then started selling a similar product called MaxAxess produced in China by Apex. The original Bionic Wrench sold for $24.99; the Apex version cost $11.99. The Browns have spent five years bringing Sears and Apex to court. The jury awarded LoggerHead $6 million in damages. Sears says they are disappointed, but that their supplier Apex will be responsible for damages.
Sears is closing at least 30 more underperforming stores, including 12 Sears stores and 18 Kmarts, with most scheduled to shut down in July.
Sears is pushing back their debt payments, having reached an agreement to extend the maturities of some of their $500 million in debt originally due in July. The loan is held by Bill Gates’ Cascade Investment LLC and by companies controlled by Sears’ CEO Eddie Lampert. Sears is also transferring pension liabilities of $515 million to Metropolitan Life Insurance company. Sears says they are working to reduce their debt and pension obligations by $1.5 billion during the year.
Revenue grew 0.1% in the first quarter to $1.2 billion. Net income was up 8.4% year-over-year. Comp store sales were down 0.2% due to decreased customer traffic, according to the approximately 3,000 Ace retailers who share daily sales data. Retail revenues from Ace Retail Holdings rose 2.8% to $52.0 million thanks to the addition of new retail stores. However, comp sales decreased 3.0%. Ace added 16 new domestic stores and canceled 21 for a net decrease of 5 stores during the quarter, which left a net gain of 56 stores from the first quarter of 2016. CEO John Venhuizen said the sales performance was lackluster and refused to blame it on the weather.
Gross billings fell 1.6% in the first quarter to $502 million and revenue fell 2.6% to $347.6 million. Net margins were essentially flat. Wholesale sales were down 1.6% on a gross billings basis. Retail comp store sales fell 1.9%. True Value said that unfavorable weather patterns across the country led to a decline in traffic, lower volume at retail and decreased warehouse replenishment. Destination True Value stores had comp store sales 200 basis points above the overall retail comp. During the first quarter True Value added 534,930 square feet of retail space.
Seeking Alpha recently published an in-depth look at how Grainger is faring in light of increased competition from Amazon. They found:
The MRO market is highly fragmented, with the top 50 distributors representing only about 30% of the North American market, which is estimated to be $160 billion. Grainger holds close to 6% of the market, making them a market leader. Grainger has a higher percentage of the market share in larger companies than its competitors, which is also a key difference from Amazon. Larger customers rely on Grainger's sales reps and expertise, and the added level of customer service. Grainger also has a store footprint of nearly 400 stores, with 19 distribution centers, which allows someone to actually go buy the product in person in the case of machinery failure or an emergency.
Grainger's KeepStock program puts vending machines at the job site and represents another layer of the customer service and convenience that Grainger offers its clients. The machines assist in inventory management, making it easier for common items to be kept at the site without requiring a staffed supply area to maintain worker accountability of materials used. The machines also upload the data on items used to allow for easier ordering of products as they get low or run out. Right now Amazon does not offer a similar program and there's no Amazon Dash Button for businesses.
Grainger currently operates the 15th largest e-commerce site in the U.S., with 65% of its sales now originating online. Most orders are shipped with next day delivery. Grainger also launched a no-frills single-channel online offering called Zoro Tools. This website offers lower prices, on average, and limited support, but it competes directly with Amazon's business-to-business offerings.
Margins have contracted significantly over the last few years as pricing has become more and more of an issue. Grainger recently adjusted list prices companywide to support large customers consolidating purchases, and dropped prices online to attempt to regain market share within the medium-sized customer segment. Q1 2017 already saw positive results from these pricing improvements, but much of the volume gains came at the price of lower margins.
Grainger expects better volume growth in the mid to high single digits in the back half of 2017, and the continued ability to pass along cost inflation with regular pricing increases. Grainger is actively cutting costs across the company to be more competitive with the likes of Amazon and to continue to gain market share.
Amazon quietly reduced their shipping threshold once again, lowering the amount needed for free shipping from $35 to $25, matching Target’s threshold and beating Walmart’s promise of free two-day shipping with a $35 minimum order. However, it will take five to eight days for shipments to arrive for non-Prime customers. Amazon Prime members get free shipping and two-day delivery on all orders.
Amazon is giving their voice-enabled Echo speaker with digital assistant Alexa a touch screen and video-calling capabilities as part of what analysts term an effort to compete with Google’s smart home offerings. The 7-inch screen on the Echo Show enables the speaker to supplement voice responses with visuals and other information displays. That could mean extended weather forecasts, cooking tutorials on demand or making video calls with other Echo Show devices or the Alexa app for iPhones and Android phones. The new Echo Show goes on sale at the end of June for $230, making it the priciest Echo yet. Amazon’s Echo currently has a market share of about 71%, with the market for voice-assisted speakers expected to double this year, with nearly 36 million Americans using such a device at least once a month by the end of the year.
American Express is expanding its partnership with Amazon by launching its new Amex skill for Alexa. Customers will be able to use Alexa to check their account balance, review recent charges and make a payment, among other options. They’ll also be able to browse limited time offers and link offers to their eligible cards. Card members will say “Alexa, open Amex.”
Amazon hosted a three-day gathering in late May at their Seattle headquarters in order to persuade some of the world’s biggest consumer package goods (CPG)brands to start shipping products directly to consumers and bypass chains like Walmart and Target. Amazon’s point is that companies should start designing products that can be shipped quickly to a consumer rather than focusing on making products stand out on store shelves. Amazon will be trying to persuade big packaged goods manufacturers that even though ecommerce is a small part of their business now it is the future of retail, and being a leader will require a major shift in thinking. Amazon has already persuaded some toy manufacturers to develop packaging that pops open more easily, and now offers thousands of “frustration free” products. Retail analysts point out that Amazon has 300 million shoppers, and can always manufacture their own private label products if brands aren’t willing to sell on their marketplace or change and adapt to new needs.
Amazon is hiring a business expert to figure out how the company can break into the multibillion-dollar pharmacy market, according to CNBC. For the last few years, Amazon has held at least one annual meeting to discuss whether they should enter the business, but with the rise of high-deductible plans and the trend towards consumers paying for healthcare, they appear ready to seriously explore the opportunity. Amazon also recently started selling medical supplies and equipment in the U.S. Analysts say the market is ripe for disruption but difficult to enter. All the major drug store companies including Walmart already offer mail order delivery.
Amazon is opening their 20th book-less campus bookstore in Cleveland. Students order textbooks and dorm furnishings online and come to the store to pick up their orders, which saves Amazon money. Amazon also gives students 50% off an Amazon Prime membership.
Amazon celebrated the streaming debut of their award-winning original movie Manchester by the Sea by giving every single home in the small Massachusetts town that was the setting for the movie a free year of Amazon Prime. Amazon announced the news by sending a gift box to every home with a code that allows people to claim their one-year Prime membership and free popcorn to enjoy while watching the movie.
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