Distribution March 2017
RETAIL SALES RISE 0.4%
Retail sales rose 0.4% in January after rising an upwardly revised 1.0% in December and were up 5.6% from January 2016. Core retail sales, which exclude auto sales and gas, rose 0.7% in January. Higher gas prices were behind a 2.3% sales increase at service stations; gas prices rose 7.8% last year. Building materials sales rose 0.3%. Sales at non-store retailers, which include internet sales as well as catalog sales, were flat in January, but up 12% over the past year. Retail sales account for one-third of all spending, with services making up the other two-thirds.
2017 RETAIL SALES FORECAST
The National Retail Federation (NRF) expects retail sales to rise 3.7% to 4.2% this year, matching or exceeding the 3.7% growth seen in 2016. Overall numbers will be given a boost by online and non-store sales, which include catalogs and kiosks. Those sales are expected to increase between 8% and 12%. The NRF says that jobs and incomes are growing, debt is low and consumer confidence is strong, but believes consumers will remain hesitant to spend until they are more certain about policy changes on taxes, trade, healthcare and other issues being hotly debated in Congress. NRF’s forecast excludes automobiles, gasoline stations and restaurants and does not factor in any potential policy changes, some of which, like health care, regulations, border taxes and tax reform, are of particular interest to retailers. The NRF says that a border adjustment tax would have the ultimate effect of raising prices for middle and working class Americans on virtually everything they purchase. In addition to expecting online sales to continue to strengthen, NRF expects strength in home and home improvement retailers, benefiting building supplies and appliances.
SUPPLY CHAIN DISRUPTION
President Trump’s call for a radical renegotiation of the North American Free Trade Agreement (NAFTA) and a tariff on goods coming into the U.S. from U.S.-owned plants operating in Mexico could bring big disruptions to supply chains, according to the Journal of Commerce. The NAFTA agreement was enacted in 1994, and economists in Mexico have said that they are not opposed to renegotiating, as the current agreement, in their opinion, favors the U.S. In addition, Trump’s continuing attacks on Mexico have helped devalue the peso, which in turn is making it less expensive for the U.S. and other foreign companies to export to Mexico as well as to manufacture in Mexico and export to the U.S.
RETAILERS MEET WITH WHITE HOUSE
President Trump hosted a White House meeting with CEOs of eight major retailers, including Target, Best Buy and Tractor Supply. Retailers wanted to encourage Trump to overhaul the corporate tax code and slash tax rates and also hoped to convince the president to oppose a new border tax on imported goods being proposed by the Republican-controlled House of Representatives. The group also met with the heads of two tax-writing congressional committees. Kevin Brady, the chairman of the House Ways and Means Committee and House Speaker Paul Ryan are leading the push to cut the corporate income tax to 20% from its current rate of 35%, one of the highest in the world. Companies that rely heavily on imports, including many retailers, say the proposed border tax would outweigh the benefits of lower corporate taxes. A group of major exporters, including GE, Boeing and Pfizer, have formed a separate coalition to support the import tax.
ONLINE SALES GROWTH
Sales online increased 15.6% to $394.9 billion in 2016, while total retail sales increased 2.9% to $4.85 trillion. Total retail sales include fuel, automobiles and other things not typically bought online. Online payments and ecommerce experts the Paypers factored out those items as well as foodservice sales and reported that core retail sales were up 3.9% to $3.37 trillion. Ecommerce sales represented 11.7% of total retail sales in 2016, compared to 10.5% in 2015. According to Paypers analysis, that means that online sales represented 41.6% of all retail growth in 2016. Amazon reported U.S. sales of $147.0 billion in 2016, a 31.3% increase from 2015 according to Internet Retailer and ChannelAdvisor estimates. That would mean that Amazon accounted for nearly 70% of the $53.1 billion growth in U.S. online retail in 2016 and 27.4% of the $127.6 billion increase in total retail sales.
THE HOME DEPOT
Q4 revenue climbed 5.8% to $22.2 billion, beating analysts expectations. Comp sales rose 5.8%, beating expectations of a 3.5% increase.
For fiscal 2016 sales rose 6.9% to $94.6 billion, and comp sales rose 5.6%. Comps for U.S. stores were up 6.2%. During the year the stronger U.S. dollar negatively impacted sales growth by about $549 million or 0.6%. They had about 3 basis points of gross margin contraction for the year, due mainly to a change in the mix of products sold. They are planning for gross margin to drop by about 15 basis points this year because they are planning on outpaced growth in lower margin categories such as appliances and certain building materials categories.
THD expects sales to rise 4.6% this year, which would equate to revenue of about $99 billion. As the housing market continues to recover, they believe they have a big opportunity to grow.
From THD’s Q4 Conference Call with Analysts:
All three U.S. divisions posted positive comps in the fourth quarter, as did all 19 U.S. regions and top 40 markets. Internationally, both Mexico and Canada posted positive comps in local currency for the quarter.
There was a good balance of growth between the Pro and DIY categories, although Pro sales outpaced DIY sales. There is a good balance between high-spend and low-spend Pros and growth is being driven by increases in transactions as well as in average ticket.
All merchandising departments posted positive comps, led by Flooring and Tools, which had double-digit comps in the quarter.
Total comp transactions grew 2.8% and comp average ticket grew 2.9%. Average ticket increase was slightly impacted by commodity price inflation and foreign currency. Big ticket sales, which are transactions over $900 and represent about 20% of U.S. sales, were up 11.6%. The big drivers behind the big ticket increase were flooring, appliances and several Pro categories.
Some categories like appliances are very promotionally driven; others like Pro-heavy products need to be priced for every day great value.
Their Black Friday, gift center and holiday programs drove record sales, and they had their highest Cyber Week ever. Tool Storage and Power Tools turned in very robust comps. Spring Black Friday is right around the corner.
The roll-out of Interline’s catalog of products is now taking place across all U.S. stores.
Their online business grew 19% compared to 2015 and now represents 5.9% of total sales.
About 45% of online U.S. orders are picked up in stores, which they attribute to their interconnected retail strategy.
During the fourth quarter they completed the rollout of Buy Online Deliver From Store (BODFS). They are pleased with the customer response to this delivery option.
Customer demands are changing, and they must continue to simplify operations for store associates.
They completed the rollout of manual flow load for trucks from their RDCs to stores in the fourth quarter. It’s a documented process for better utilization or cube-out of trucks on route to stores. It’s standardized across all stores and reduces transportation costs by fully utilizing the capacity of each store-bound truck and improving freight movement at the back of their stores.
98% of stores qualified for Success Sharing, their profit sharing program for hourly associates.
They’re planning to invest about 2% of sales into capital spending, investing in initiatives including interconnected retail, supply chain and stores. They need to do some reconfiguration in stores to accommodate the number of online orders that are picked up in stores. This year about 500 stores will be getting a new store environment.
The Home Depot ventured into wind power with a 20-year contract to the Los Mirasoles wind farm in Texas, which is owned and operated by EDP Renewables North America. Their deal for a fifth of the wind farm’s capacity will provide enough energy to power 100 Home Depot stores for a year. THD has a target of procuring 135 MW of renewable energy sources by the end of 2020. Home Depot also purchases power from solar farms in Delaware and Massachusetts.
THD once again was one of the top retailers that excelled in customer service in the 20th Annual Mystery Shopping Study from Astound Commerce. Winning merchants scored highest in four critical areas: visibility, overall customer service, speed of delivery and efficiency of checkout. The Home Depot was the only home center store in the top ten.
Q4 sales increased 19.2% to $15.8 billion and comp sales increased 5.1%. For the fiscal year, sales rose 10.1% to $65.0 billion and comp sales grew 4.2%. Comp sales for U.S. stores increased 5.1% for the fourth quarter and 4.1% for the year. Results beat analysts’ expectations.
CEO Robert Niblock said that they were well positioned to capitalize on a favorable macroeconomic backdrop for home improvement by expanding customer reach and developing capabilities to anticipate and support customer needs.
Lowe’s promoted Jocelyn Wong to chief marketing officer; she succeeds Marci Grebstein, who left the company. Wong was most recently senior vice president and general merchandising manager for the seasonal business. She’ll report to Michael McDermott, chief customer officer. Wong was senior vice president and chief marketing officer at Family Dollar before joining Lowe’s in 2015.
Q4 sales rose 1.0% to $130.9 billion, and comp store sales rose 1.8%, exceeding expectations. Net sales at WalMart U.S. rose 2.8% to $83.7 billion. WM International net sales dropped 5.1% to $31 billion. However, net profits dropped 17.9% and full year profits fell 7.2% due to heavy investment spending and a strong dollar.
Ten out of 11 markets posted positive comp store sales increases. Sales at Sam’s Club were up 1% to $14.9 billion.
Buy online, pick up in store grew 27% during the holidays. Ecommerce sales grew 29%. CEO Doug McMillon said that they are now the second-largest U.S. online retailer by revenue and third largest by sales. They now have more than 35 million SKUs on Walmart.com.
WM posted three consecutive quarters of positive comp store sales in fiscal 2017. They are in the process of upgrading their U.S. stores, and expect capital expenditures to be about $11 billion in fiscal 2018.
Walmart is adjusting their purchasing so that one buyer will be able to purchase product for both stores and online. Previously the supplier would need to work with separate buyers if they wanted their products to be available on both platforms. Walmart says it is part of their drive to make sure the full assortment of products offered in stores is available on their website. Walmart held a two-day supplier conference to discuss their plans with about 4,000 suppliers at their headquarters in Rogers, Arkansas. Suppliers that have products that are only meant for the website will continue to work with the Walmart.com buying team.
Walmart acquired online outdoor retailer Moosejaw, which carries top brand such as Marmot and Patagonia, for about $51 million. In addition to its online presence, Moosejaw also has 10 store locations. Moosejaw will continue to run as a standalone brand, with CEO Eoin Comerford and his team based in Michigan.
Sears had a dismal fourth quarter, with total revenue dropping 16% to $6.1 billion and comp store sales falling 10.3%, with an 8.0% drop at Kmart and a 12.3% decline at Sears. Despite warnings by many analysts and industry experts that Sears cannot survive, CEO Eddie Lampert continues to remain upbeat.
Sears announced a comprehensive restructuring that will cut at least $1 billion in operating costs annually. The plan involves reducing corporate overhead, closer integration and consolidation of the Sears and Kmart operations and improving their merchandising, supply chain and inventory management. Some of the $1 billion in savings will come from the previously announced 150 Sears and Kmart store closings, with more closings likely. Sears also plans to reduce their outstanding debt and pension obligations of $1.5 billion this year.
Sears plans to use data analytics to optimize product assortment at Sears and Kmart stores. They hope to be able to select products that better meet the needs of their “Best Members” and focus on profitable, high return “Best Categories.”
Sears sold five Sears department stores and two Sears Auto Centers to mall owner CBL & Associates for $72.5 million. Sears will lease back the space for roughly $5.1 million. CBL can terminate the leases at any time except the busy holiday period of November through January. Sears has been selling assets to raise money to fund operations.
Q4 revenue rose 5.8% to $1.2 billion and full year revenues rose 1.6% to $5.1 billion. Wholesale revenues rose 1.5% to $4.9 billion. The approximately 3,000 Ace retailers who share daily retail sales data reported a 4.4% increase in retail comp store sales during the fourth quarter. Sales were driven by increases in customer count and average transaction size. Comp store sales at those stores were up 2.5% for the full year. Ace reported a record $157.9 million in patronage dividends (a form of profit sharing), driven by sales growth, 152 new domestic stores and “hard work by the entire Ace team.” Outdoor living and lawn and garden were the fastest growing categories.
Revenues from Ace Retail Holdings, which is the Westlake Ace Hardware chain, rose 7.7% to $64.4 million in the fourth quarter.
Ace plans to expand their redistribution center in Suffolk, Virginia, which is their East Coast hub for receiving imported merchandise through the Port of Virginia. The expansion will help speed up product distribution to 10 of Ace Hardware’s 14 retail support centers that serve retail stores as far as Texas, New York and Florida. The expansion will add 138,000 square feet to the existing 336,000-square-foot facility that opened in 2012. Construction should be finished by November.
Grainger will stop reporting monthly sales results and instead begin hosting live quarterly conference calls beginning with the release of first quarter 2017 results scheduled for April 18, 2017.
Grainger introduced the Knowledge Center by Grainger. The online resource center housed on their website is designed to provide insights and information to customers who are looking for ways to save time and money, while increasing productivity. The Knowledge Center contains articles and information from Grainger and third-party professionals who provide perspectives on the latest trends affecting customers in industries such as manufacturing, healthcare and commercial services. Key topics covered include inventory management, facility maintenance, emergency preparedness and regulatory compliance, among others. The Knowledge Center will be updated daily and include a mix of articles, videos, infographics, webinars, white papers and e-books.
Q4 sales rose 22% to $43.74 billion, below analysts expectations. Amazon said that fluctuations in foreign currency contributed to the results. Analysts note that while low cost and fast delivery are fundamental parts of Amazon’s consumer appeal, they also eat into profits. Amazon Web Services (AWS) continued to grow, with Q4 sales rising 47% to $3.54 billion.
For the full year, Amazon’s net sales rose 27% to $136.0 billion. Prime members were responsible for much of the increase. Prime members can now choose from more than 50 million items with free two-day shipping, up 73% from 2015, according to CEO Jeff Bezos. Prime Now added 18 new cities in 2016, which means millions more members can get one and two hour delivery.
Amazon expects net sales in the first quarter of 2017 between $33.25 and $35.75 billion, slightly below analysts’ expectations.
Amazon added a net of 26 new warehouses in 2016, compared to 14 in 2015.
Amazon quietly rolled back the threshold for free shipping from $49 to $35 (or $25, if the order contains $25 or more in books) to be competitive with Walmart, which recently announced free two-day shipping for orders of $35 or more. Amazon raised their free shipping threshold to $49 a year ago, presumably to grow Prime membership, as Prime members get free shipping with no minimum order.
Amazon offered an $8.62 discount on all purchases of $50 or more after they earned a score of 86.27 in this year’s Harris Annual Corporate Reputation Poll. They ranked number one in the poll for the second consecutive year, with a score that was a record high in the 18 years the poll has been taken. The Harris Poll surveys more than 23,000 Americans on topics including products and services, emotional appeal and financial performance.
A spokesperson for Amazon refused to comment on persistent rumors that Amazon plans to buy a large physical retailer. Amazon now has seven college campus stores, and has three bigger book stores up and running, with plans to open five more. Amazon can certainly afford to buy a retailer if they want to; they have $20 billion in cash and a market value close to $400 billion. Some analysts point to struggling Macy’s, J.CPenney or Sears; others argue that Dollar General would help Amazon increase its presence in rural markets where there would be less competition from other large chains.
Amazon is contemplating the concept of equipping their delivery drones with parachutes, so they could float packages down to the ground in situations where landing could be tricky. The potential plans are outlined in a new patent. Landing a drone takes more time and energy than keeping it in the air, according to the patent application. Amazon’s Super Bowl ad promised drone deliveries would start “soon.”
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