Distribution June 2020

Retail Sales Plunge 16.4% 
Retail sales plummeted 16.4% in April after falling 8.7% in March and were down 21.6% from April 2019. Core retail sales, which exclude automobiles, gasoline and sales at building and supply stores and factor into calculations for GDP, fell 16.2% after posting modest gains in March. Sales at building and supply stores fell 3.4% after being up 1.3% in March. Even grocery stores saw a decline, with sales down 13.2% after rising 26.9% in March. Online sales were the only category to grow, with April sales up 8.4% from March and 21.6% from April 2019. Furniture and home furnishings stores and electronics and appliance stores saw sales drop nearly 60%.
 
The Home Depot
Q1 sales rose 7.1% to $28.26 billion, beating estimates of $27.54 billion. Comp sales rose 6.4%. THD missed estimates on quarterly profits because they spent about $850 million on benefits for employees who were keeping stores and warehouses running through the pandemic. THD provided additional bonuses, double pay for overtime and added more hours of paid time-off.
 
THD withdrew their guidance for the full fiscal year due to the uncertainty related to the duration of CV19 and its impact on the broader economy.
 
Q1 Conference Call with Analysts:
 
Comps rose 6.4% overall and 7.5% in the US for the quarter. All three US divisions posted positive comps, as did 17 of 19 regions. The two exceptions were the New York Metro and South Florida regions. New York and the surrounding areas suffered from an outsized impact from CV19 and South Florida was negatively impacted by stores in Puerto Rico being completely closed.
 
Three weeks of widespread shelter in place mandates and the limits they imposed on store occupancy depressed weekly performance and resulted in negative double-digit comps during those weeks. There were extreme ups and downs from week to week over geographies and categories.
 
Their focus continues to be on the safety and well-being of associates and customers and providing customers and communities with essential products and services. Being aligned around those two objectives enabled critical speed and flexibility when making decisions and implementing a number of changes across the business in this rapidly evolving and fluid environment.
 
They believe The Home Depot is uniquely positioned to weather this pandemic crisis. The investments they have made over the years have allowed them to quickly adapt to shifts in customer needs, preferences and behaviors. Their interconnected retail strategy has supported record level web traffic for several weeks without disruption.
 
Sales leveraging digital platforms increased 80% in the quarter and more than 60% of the time customers chose to pick up orders at a store.
 
Their associates and supplier partners have been collaborating to deliver what was needed. Early on when the pandemic was affecting the supply chain in China, they established regular and frequent contact with suppliers, both internationally and domestically.
 
Early in the pandemic they reached out to PPG, one of their key paint suppliers, and asked if they could help supply hand sanitizer for associates. They converted several manufacturing lines and within a few weeks produced an initial order of more than 100,000 gallons. They are planning to produce three times that amount for use by in-store associates over the rest of the year.
 
The digital business accelerated from approximately 30% growth in early March to triple-digit growth by the end of April. Daily traffic to the website reached new records towards the end of the quarter, consistently above Black Friday levels.
 
For Q1 they saw positive comps in 11 of 14 merchandising departments. Comps in kitchen and bath and flooring and millworks, which rely on in-home installation, were negative. People spent more on tools for DIY projects, including painting, gardening and small repairs. THD also saw a surge in demand for cleaning supplies.
 
 
They saw strong comps across most departments during the last three weeks of the quarter even though they were restricting customer traffic and maintaining safety protocols.
 
Big ticket comps were up 2.5% for the quarter, with strength in appliances and lawnmowers offset by categories requiring installation.
 
DIY sales grew faster than Pro sales for the quarter. They continue to have a high level of engagement with Pros, but certain states and municipalities restricted in-home activity which impacted Pros. Smaller Pros performed well throughout the quarter, while larger Pros were pressured. They suspended certain non-essential services such as kitchen remodels.
 
Pros faced a lot of restrictions in states with strict shelter-in-place regulations and restrictions on construction. Larger jobs have been postponed, but not canceled, which means most customers are planning to resume work once the crisis passes.
 
Average ticket was a very strong $74.70, up 11.1%, while the total number of transactions fell 3.9%. CEO Craig Menear speculated that was due to the fact that people tried very hard to limit their exposure and focused on getting everything they needed in one trip.
 
They are not planning on negative comps during Q2 nor are they planning on a negative year. Typically, recessions not driven by housing have shallow performance declines but this is a unique situation and it is impossible to predict the duration.
 
Sales through their website surged. They more than doubled the number of ecommerce customers and their app downloads nearly doubled as well. Their penetration of the ecommerce category jumped to just under 15% for the quarter.
 
Lowe’s
Q1 sales grew 11.2% to $19.7 billion and comp sales grew 11.2% overall and 12.3% in the US. Ecommerce sales increased 80%. Canada posted negative comps, with performance impacted by store closures and regulatory-related restrictions.
 
Lowe’s withdrew their full-year guidance, saying the future is too uncertain and volatile to make projections.
Q1 Conference Call with Analysts:
 
Their focus shifted from running their business in ways designed to achieve their financial plan to functioning as an essential retailer in a pandemic. They committed to keeping associates and customers safe, supporting their communities, first responders and healthcare providers and financially supporting their associates.
 
The US home improvement comp was driven by strong demand from both DIY and Pro customers. Overall demand strengthened over the quarter. The uptick in DIY demand was partly driven by an early spring in many western and southern geographies and customers focusing on their homes.
 
CEO Marvin Ellison speculated that customers used their stay-home time to tackle long to-do lists they hadn’t had time to focus on.
 
Comp sales for Pros were strong and as expected, they saw increased demand in CV19-related products such as cleaning supplies, as well as appliances, including refrigerators and freezers.
 
They estimate that the pandemic contributed approximately 850 basis points to comp sales growth.
 
They implemented additional safety protocols at point of sale checkout, outside garden and the paint desk. The store teams were so effective that their customer service scores improved 200 basis points year over year in the quarter.
 
Their investments in online infrastructure and progress with the Google Cloud migration greatly improved site stability and allowed them to handle the increased traffic. Online sales grew 80% overall, with even strong growth for Pro customers. Online penetration increased to 8% of total sales.
 
All geographic regions and all three US divisions had positive comps, with the West once again the top performing geography. Rural stores outperformed the company comp by more than 250 basis points, while urban stores experienced more disruption. About 10% of stores are classified as urban; they negatively affected results by 400 basis points. 
 
They dramatically limited promotional messaging and highlighted commitment to communities and appreciation for associates. They were a presenting sponsor on ESPN for the NFL Draft, which posted record-setting viewership. They used that time to spotlight and thank associates and first responders.
 
Some steps they took limited sales, but demonstrated commitment, including closing stores three hours early, closing on Easter Sunday, reducing promotions and limiting customer access to key areas like paint and garden.
 
Lowe’s has hired more than 100,000 associates for the spring season and shared their best practices with the Retail Industry Leaders Association.
 
CV19 is the only competitive threat they are focused on right now.
 
Facilitating social distancing required them to implement several new programs, including additional signage and floor markers, social distancing ambassadors to manage customer traffic flow, leveraging new technology to monitor store traffic and removing product from the stores to free up additional space for customers, particularly in high-traffic areas.
 
They also implemented more stringent cleaning procedures, added more hours for third party cleaning services and closed early to allow for increased cleaning and restocking.
 
Lowe’s was one of the first retailers to install Plexiglas shields at point of sale in all stores and distribute gloves and masks to associates.
 
Winning Together profit sharing bonuses were earned by 100% of stores during the quarter, totaling $87 billion.
 
Core Pro categories performed well, with double-digit comps in rough plumbing, hardware and tools. Installations fell by 50% as many customers refused to allow installation work in their homes.
 
They continue to see strong customer response from Craftsman and strength from their launch of the new Kobalt XTR 24-volt power tool platform, which is being embraced by both heavy DIY and Pro customers. They are seeing good results from the addition of their exclusive DeWalt 12-volt line of compact power tools.
They also continue to showcase innovative new tool products from Bosch, Lufkin, Spider and Metabo HPT, along with Cobalt. These brands along with their investment in job lot quantities and their improved Pro service model are driving new customer trial and increasing their share of wallet from existing Pro customers.
 
Strategic progress in 2019 allowed them to execute well during the quarter. Having merchants in place for the full year allowed for better planning and made it easier to respond to rapidly changing operating requirements.
 
Their field merchandising teams also responded to 10 tornadoes and two earthquakes impacting parts of the US during the quarter.
 
They will be leveraging their position as the number one destination for outdoor power equipment in the US with their leading brands.
 
Strong trends have continued into May with strength in both DIY and Pro across nearly all merchandising categories and geographies. They think Pro customers have migrated to primarily outside projects. They also believe the current environment is favoring small “pickup truck” Pros who are less impacted by macroeconomic factors.
 
They do not anticipate negative comps but do expect to see sales start to moderate over the rest of the year.
 
They do not believe sales have been pulled forward; they believe there has been a seismic shift in demand and customers are focusing on projects around their homes.
 
When customers began asking for curbside pickup, they were able to implement it on Lowes.com in just three days; they would never have been able to accommodate something like that in the past. Approximately 90% of online sales are fulfilled or picked up at a store, which helps defer the cost of operating the platform. In-store pick up accounts for about 60% of orders and stores shipping out the remainder.
 
The exterior installation business is picking up strongly; in-home installs will be slower to recover.
 
They want to be known as a value-oriented retailer, not a promotional one. They will probably not use traffic-driving media in this environment but when customers come in they want them to find value on the shelves. They have not seen any signs customers are trading down.
 
Other News:
 
CEO Marvin Ellison noted that they are seeing their stores in states that are beginning to reopen outperform overall company comps. Ellison believes that provides hope that they will be able to sustain their performance, even in a more crowded competitive landscape.
 
Lowe’s spent $80 million for a special payment to hourly associates in May for unplanned expenses and hardships. Hourly employees received a one-time bonus of $300, while part-time employees received $150. Lowe’s made a similar special payment in March. Lowe’s has more than 300,000 employees at 2,200 stores; roughly 90% are hourly employees.
 
Lowe’s is requiring all employees to wear a mask or approved face covering when working in stores or at customers’ homes. Managers continue to monitor store occupancy and limit customer traffic. Store layouts have been changed to provide more space in aisles, and Plexiglas protective shields have been added at all points of sale.
 
Lowe’s donated $1 million worth of flower baskets for Mother’s Day to 500 long-term care and senior living facilities across 12 markets impacted by the pandemic, including Charlotte, New York, Seattle, Chicago, Boston, Houston and Miami. They sourced the baskets from local nurseries and growers nationwide whose business has been affected by the pandemic.
 
Analysts are quite bullish about Lowe’s prospects after analyzing their Q1 results. Many noted that Lowe’s ability to respond to the crisis was impressive, with Lowe’s demonstrating flexibility and sound planning.
 
Walmart
Q1 revenue rose 8.6% to $134.62 billion, easily beating expectations. Comp sales in the US rose 10% and ecommerce sales jumped 74%. Foot traffic fell for the quarter, but average transaction rose 16.5%.
Walmart absorbed about $900 million in additional costs related to CV19, including raising wages for warehouse workers and paying bonuses to store staff. They also hired 235,000 new workers.
 
Walmart withdrew their financial guidance for the year, saying that the situation was too uncertain to make projections. However, they stated that Walmart was well positioned to operate through the crisis and has benefited from other stores closing and other websites being slowed by high traffic.
 
Walmart expanded their two-hour Express Delivery service in early May, rolling it out to nearly 1,000 stores. Walmart ran a pilot program in 100 stores that began in mid-April and is expanding it because of customer demand. Walmart has added more personal shoppers to fill Express Delivery orders, which add an additional $10 to current delivery fees. Walmart’s Delivery Unlimited customers, who pay $98 per year, pay a flat fee of an additional $10 per Express order.
 
Walmart will shut down Jet.com, the ecommerce site they acquired in 2016. Walmart.com is doing fine without Jet, with a 74% increase in revenue during the first quarter. Walmart spent $3 billion on Jet in 2016 but it never really took off. However, Walmart credited Jet with accelerating Walmart’s own omnichannel strategy.
 
Menards
Menards is requiring customers to wear face masks,
although it was not clear if the policy applied to all of Menard’s 300 stores in 14 states. The CDC recommended that people wear face covering in public in April, but it is not required.
 
Ace Hardware
Sales for fiscal 2019 rose 6.2% to more than $6 billion for the first time in the co-op’s history. More than 80% of sales came from wholesale purchases. Store count increased from 4,476 at the beginning of 2019 to 4,556 at the close, and the number of retailers with multiple outlets rose to 671 from 643. Warehouse sales of private label Ace brands were more than $659 million in 2019, about 14% of their domestic wholesale merchandise sales. At the end of 2019, Ace had about 50 million Ace Rewards members. They had more than 102 million visitors to their website in 2019, with ecommerce revenues up 59%.
 
Led by paint, merchandise sales were steady. Hand and power tools accounted for about 11% of sales.
 
Q1 revenue rose 3.8% to $1.43 billion and comp sales increased 4.2% at the 3,200 Ace retailers who share daily retail sales data. Average ticket rose 5.1%, but comp store transactions fell 0.9%.
 
Ace added 22 new domestic stores in the first quarter and cancelled 12 stores, leaving the total domestic store count at 4,566 at the end of the first quarter, up 60 stores from Q1 2019.
 
Ace gave out 1 million American flags on the Saturday of Memorial Day weekend to honor those who made the ultimate sacrifice for their country. They once again collaborated with the Veterans of Foreign Wars (VFW). Ace gave each customer who came in on Saturday a free flag and also donated one to a local VFW Post to be used for marking and honoring veteran graves on Memorial Day.
 
Amazon
Amazon removed quantity limits on products suppliers can send to their fulfillment centers in order to speed up delivery. The limits were initially put in place so they could focus on essential goods. The one-day and two-day shipping promised to Prime members proved to be very difficult to achieve.
 
Reports surfaced that Amazon may be contemplating acquiring J.C. Penney, which recently filed for a CV19-induced bankruptcy. Amazon is reportedly eager to expand their apparel business.
 
Amazon will reportedly move Prime Day from their anniversary in July to September, according to the Wall Street Journal. Amazon’s ongoing CV19 blog states that their top concern is ensuring the health and safety of their employees. Prime Day puts an enormous strain on warehouse and delivery workers. In addition, consumers will need to have a better understanding of how the economy will bounce back and be confident they have jobs before they will want to splurge, no matter how good the deals might be.

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