Retail Sales Fall 1.2%
Retail sales for December fell 1.2% after rising a downwardly revised 0.1% in November. Sales were up 2.9% from December 2017. Total retail sales for 2018 were up 5% from 2017. Core retail sales, which exclude food services, car dealers, building-materials stores and gasoline, were down 1.7%, the biggest drop since the September 11, 2001 terror attacks. All but two of 13 major retail categories showed declines, with online stores dropping 3.9%, the biggest decline in that category since November 2008. Economists noted that falling gasoline prices and a rebounding stock market should strengthen sales in the months to come.
Holiday Retail Sales Grow 2.9%
Holiday retail sales for 2018 grew 2.9% to $707.5 billion, well below expectations of 4.3% to 4.8% growth. The National Retail Federation commented that it appears that worries over the trade war and turmoil in the stock markets impacted consumer behavior more than expected. Online and other non-store sales grew 11.5%; expectations were for growth between 11% and 15%. Sales at building materials and garden supply stores were up 1.6% to $61.5 billion. In November sales grew 5.1% year over year, but December growth fell to just 0.9%. The NRF is forecasting that retail sales will increase between 3.8% and 4.4% to more than $3.8 trillion this year.
The Home Depot
Q4 sales rose 10.9% to $26.5 billion, below estimates of $26.6 billion. Comp store sales rose 3.2% overall and 3.7% in the US, also below analysts’ forecast of a 4.5% increase. Sales in Canada were essentially flat.
Fiscal 2018 sales grew 7.2% to $108.2 billion, making it a record year for THD.
For 2019, THD expects sales to grow 3.3% and comp sales to grow 5%.
Q4 Conference Call with Analysts:
The fourth quarter faced tough comps because there was $400 million in hurricane-related sales in Q4 2017. They had planned for that, but not for the unfavorable weather experienced in all regions throughout the quarter. It was cold, snowy and wet; CEO Craig Menear noted that nothing delays projects like wet weather.
CEO Craig Menear said he is particularly excited about the investments they are making for Pros. During the quarter, they announced a consolidated approach for Pro customers under the banner Home Depot Pro. They continue to invest in a more personalized offering for Pro customers with a new B2B web experience. They now have more than 100,000 Pro customers in the test program and have plans for continuous enhancements and new features and capabilities. They intend to roll out the new Pro online experience to more than one million Pros in 2019.
They continue to make big strides in driving the digital experience. Online sales grew 22.7% in the fourth quarter and 24.1% during fiscal 2018 and represented 7.9% of total sales.
Approximately 50% of online orders in the US are picked up in store, and 94% of customers give their locker pickup experience four out of a possible five stars.
Approximately 40% of US stores now have a new look and feel and customer response has been very positive.
They are also working on enhancing the delivery and fulfillment process and spent last year testing several pilots to help them create the most efficient delivery network.
Tool comps were above average for the quarter.
In Q4 average ticket increased 2.3% and comp transactions increased 0.9%. The year was very volatile for many commodities, especially lumber. In the fourth quarter, deflation and lumber negatively impacted average ticket growth by 41 basis points.
Big ticket comp transactions of $1,000 or more, which represent 20% of US sales, were up 4.8%. Excluding hurricane-affected markets, big-ticket comp sales in January were up almost double-digits compared to 2018.
Pro-heavy categories were very strong, including power tools, water heaters and commercial and industrial lighting.
Black Friday produced the single-highest sales day in company history.
Last year they formed 50 cross-functional teams charged with improving the online customer experience. The teams have accomplished a great deal in a short time. In 2018 they had a milestone of 2 billion online visits and their conversion rates consistently improved throughout the year. This year they will continue to roll out digital enhancements.
Total sales per square foot increased 7.2% to $447, the highest in company history. At the end of the fourth quarter merchandise inventories grew $1.2 billion to $13.9 billion and inventory turns were 5.1 times, flat compared to fiscal 2017.
During the year they invested approximately $2.4 billion in the business through capital expenditures. This year they plan to invest $2.7 billion to support their strategic initiatives.
They are using GDP growth of 2.6% for planning purposes for this fiscal year. They factor in the expected spending impact from key housing metrics, including home price appreciation, housing turnover, household formation and the age of housing stock, and use the results to plan sales growth.
Weather adversely affected sales in many markets. In markets that were not affected by bad weather in the fourth quarter they had outstanding performance. Comp sale in Seattle were up 6.3%.
The Harvard Joint Center for Housing is forecasting 5% growth for remodeling activity in 2019, according to Carol Tome, which factored into their projections for the year.
Their plan is commodity-inflation neutral, and there is nothing built in for tariffs, as they feel it is impossible to plan for things that might or might not happen, although if the tariffs with China had actually been put in place, they had programs in place to manage through that.
They have seen increased cost expectations from suppliers, based on wages, transportation, supply chain, fuel and other things they are experiencing. It appears that some of those pressures may actually be abating a bit.
Their five direct fulfillment centers are already providing one and two-day delivery service to more than 90% of the population. Home Depot Pro will give them nearly national coverage with next day delivery via 700 private fleet trucks. They’ve opened three market delivery operations and have openings and groundbreakings planned throughout the year on new platforms, market delivery operations, flatbed delivery centers and more. Their car delivery option covers 40% of the US population; 70% of the population is covered when you add in van delivery options.
They have tried to work the impact of gas prices into their projections but have never been able to draw a solid correlation.
THD is cutting four underperforming units from their exterior installation business, including roofing, siding, insulation and gutter installation. THD will continue to offer dozens of other installation services. Some of the affected 1,000 employees may be moved to other departments. THD says they are still committed to exterior installation services, but just did not see the potential for enough growth in the units they cut.
THD increased their commitment to procure more energy from alternative sources including wind and solar power. THD entered into a 15-year power purchase agreement with Pretty Prairie wind farm in Kansas. The power purchased will be enough to supply about 40 stores for a year. THD also buys power from wind farms in Texas, Delaware, Massachusetts and Minnesota, as well as Mexico. THD is targeting a 40% reduction in carbon emissions by 2030 and a 50% cut by 2035.
The Home Depot has invested in delivery service Roadie, which is advised by Frank Blake, the former CEO of The Home Depot. THD has also partnered with Deliv, with an objective of rolling out express same-day and next day local delivery for thousands of items to 35 major metros across the US. Roadie said its same-day delivery footprint now reaches more than half of all US households, including small cities and towns.
Q4 sales rose 1.0% to $15.65 billion. Comp store sales rose 1.7% overall and 2.4% in the US. Comp sales in the US rose 5.8% in January, the final month of the fourth quarter of FYI 2018. Full-year sales rose 2% to $71.31 billion. Lowe’s expects sales in fiscal 2019 to rise 2%, with comp store sales rising 3%.
Lowe’s anticipates continued weakness in the Canadian housing market in the near-term, but remains confident in their market position in Canada and the long-term potential of the Canadian business.
Q4 Conference Call with Analysts:
Comp sales were positive in 11 of 14 geographic regions and eight of 11 product categories. Great offers in tools and hardware delivered above average comps. Craftsman products gained market share across every category. Online comps grew 11% for the quarter.
Average ticket grew 4.6% in the fourth quarter to $76.96 but total transactions declined 3.6%. Comp sales growth of 1.7% was driven by an average ticket increase of 2.3% and partially offset by a 0.6% decline in transactions.
Website traffic was good, but they were unable to fully capitalize on traffic due to systems challenges. The holiday season made it clear that they needed to redirect their online strategy and focus. Therefore they made a leadership change in January, hiring Mike Amend as the new President of Online business. Mike will work with their new CIO Seemantini Godbole, who previously ran Target’s online business, to aggressively transform lowes.com this year. Approximately 60% of online orders are picked up in store.
They are focusing on four key areas: driving merchandising excellence, transforming the supply chain, delivering operational efficiency and intensifying customer engagement.
Their second area of focus has changed since their analysts and investors conference from omnichannel to supply chain transformation. They believe improvements in all four key areas will deliver a better omnichannel experience for customers.
They believe the US home improvement business will benefit from several factors, including income growth, lower federal tax rates, rising household formations and home price appreciation. In addition, housing stock is aging and people are staying in their homes longer.
The executive team, which primarily consists of new hires, makes store visits weekly. They are still seeing pockets of inconsistent execution, but they are also beginning to see improvements in key areas.
They are delivering better customer service, and customer satisfaction scores have improved for both DIY and Pro customers.
The merchandise service team (MST) pilot showed positive results. These teams are funded by their vendors and add an average of eight full-time employees per store. They are responsible for the day-to-day maintenance of presentations in the stores. They are critical to execution and are taking time consuming tasks off the shoulder of employees, freeing them up to spend more time with customers. They value their vendors, and realize they have a history of being inconsistent with their vendors and are now trying to be very transparent and make sure the teams communicate with vendors frequently.
They are seeing strong customer response to Craftsman and are very excited about the product launch of Craftsman outdoor power equipment this spring. Their research shows that approximately 60% of Craftsman customers were not previously Lowe’s customers. So Craftsman is driving traffic and bringing in new customers. They will continue rolling out Craftsman products this spring.
They are seeing positive results in their Pro business, partially driven by their investment in job lot quantities. The test markets were very successful, and they are rolling the program out nationwide this spring. The Pro customer will be a key focus in 2019. They will be investing in dedicated supervisors and increased service for Pros. They have high expectation for Pro but have a lot of work to do. Many Pros stopped shopping at Lowe’s because of chronic out of stock situations. They need to serve current customers better and attract new customers. They brought in a few very experienced leaders for Pro and feel good about the progress they are making.
This spring they will be rolling out their field merchandising teams (FMTs). They will focus on meeting the needs of customers in the local market and making sure products are locally relevant.
They will dramatically increase their online assortment in 2019 as they shift slower moving SKUs out of stores and onto the website to improve inventory turns.
They instituted programs within the stores to make sure they are keeping shelves stocked, and since the launch they have seen in stocks improve 15%. They gave store managers limited autonomy to reorder appropriate quantities of low risk, high velocity SKUS to improve in stock on key items.
They eliminated some responsibilities of associates so they can focus on selling and customer service, and as a result have seen an increase in sales productivity and customer satisfaction scores.
During the first quarter they are training all associates on smart customer service and will also rollout smart mobile devices to stores, so associates will have real-time data at their fingertips and won’t have to leave the sales floor to check prices, stock quantities or order status.
They are also rolling out a new labor scheduling system that will better predict customer demand and let them align labor to peak traffic times.
They are replacing a series of non-customer facing positions with more than 600 assistant store managers and more than 5,000 department supervisors.
Margins were pressured during the quarter by supply chain and transportation costs, tariffs and a shift in product mix.
By the time new merchandising chief Bill Boltz took over in mid-August planning for spring was well underway, so they had to make a lot of adjustments in a very short time frame heading into the holidays. One of the changes they made was in quickly setting spring merchandise rather than using floor space to clear out holiday.
The paint department was one of their first areas of focus and they are very pleased with the results so far and their partnership with Sherwin Williams.
They have made a lot of progress in a very short period of time but have a ways to go to become the great company they know they can be.
Q4 revenue rose 1.9% to $138.8 billion, and full year revenue rose 2.8% to $514.4 billion. Online sales jumped 43%. CEO Doug McMillon said that their US business exceeded their expectations even as they invested in ecommerce and wages. He said they plan to “play offense” as they continue to innovate in ecommerce.
McMillon noted that progress is slower than they would like. They are trying to build an apparel, home and hardlines business that brings customers back, but including the brands they want to add is taking longer than they would like.
Guidance for 2019 includes Walmart’s US comps growing 2.5% to 3% and Sam’s Club expanding about 1%. US ecommerce is expected to grow net sales by about 35%.
Walmart and logistics firm Deliv have ended an alliance to deliver food ordered over the internet. Deliv was one of Walmart’s first partners. People familiar with the situation said that Deliv drivers often had to wait 40 minutes or more to pick up food orders, partially because Walmart gives customers priority over delivery drivers during regular hours. Walmart said that the decision to end the alliance was mutual.
Menards has stopped purchasing paint removers that contain a pair of chemicals blamed in dozens of deaths after company officials were pressured by many different advocacy groups. The chemicals are methylene chloride and N-methyl pyrrolidone or NMP. Many other companies, including Walmart, Home Depot, Lowe’s and Sherwin-Williams, earlier agreed to stop selling paint strippers with the dangerous compounds. Brand names involved include Klean Strip, Goof Off and Jasco.
Sears is reportedly looking for a new CEO who would work under Eddie Lampert, but analysts say the position could be very difficult to fill. Candidates will be concerned about the realities of working with the high-powered hedge fund owner and analysts doubt Lampert will be able to give the CEO autonomy to operate independently.
Sears launched a new line of Craftsman tools that feature tool sets designed for mechanics. The collection is exclusively available at Sears and Sears Hometown stores as well as online at Sears.com. The new line was reportedly created with input from mechanics.
Sears says that more than 40 Kenmore smart appliances have been certified as “Works with Alexa,” meaning that they meet Amazon’s criteria for responsiveness, reliability and functionality. Customers will be able to use voice commands via Alexa to control their Kenmore appliances, including washing machines, dryers, dishwashers and refrigerators.
Q4 revenues rose 5.7% to $1.39 billion and full-year revenues rose 6.1% to a record-setting $5.7 billion. CEO John Venhuizen said that strong new store growth, a 1.4% increase in comp sales and a 43% increase in online revenue all contributed to the strong Q4 results. Average ticket rose 3.3% and comp store sales rose 1.3%. For the full year a comp sales increase of 2.3% and an average ticket increase of 3.3% was partially offset by a 0.9% decrease in comp transactions. Power tools, outdoor living and electrical showed the largest gains.
True Value hosted their 2019 Spring Reunion in Dallas in late February. More than 7,000 people were expected to attend, including 3,000 independent retailers. A new program is called The Pro Yard, a display of more than 300-linear feet of customer pro-focused lumberyard assortments set on 5-foot fixtures. They hosted a Retailer Best Practices Conference and a 500,000 square feet showroom filled with attendee-only deals.
True Value will invest $150 million in supply chain optimization, including a new distribution center in Pennsylvania. The 1 million square feet of distribution space is currently under construction. The center will support the entire Northeast region, which consists of more than 1,000 retail locations. True Value currently operates 13 distribution centers. The center is scheduled to open this fall.
Amazon canceled plans to build one of two new regional headquarters in New York after strenuous opposition to tax breaks and other incentives offered to the company. Amazon was also opposed to being required to allow its New York workers to unionize. The final straw appeared to have been the appointment of Senator Michael Gianaris, a very vocal opponent of Amazon, to the little-known state board that would have had to approve New York City’s deal to bring Amazon to Queens.
Amazon plans to acquire eero inc, a company that offers products and services for high-performing home WiFi that utilizes the eero app. Eero systems are self-updating, self-fixing and self-improving in real time as they communicate with the cloud for instructions and updates.
Amazon is launching a new program called “Shipment Zero,” an aggressive supply chain carbon initiative with the goal of net zero carbon emissions for 50% of Amazon shipments by 2030. Amazon’s long-term goal is to have net zero carbon emissions for all deliveries and to power all of its global infrastructure using 100% renewable energy. Amazon already operates 11 solar and wind farms in Indiana, Virginia, Ohio, Texas and North Carolina.
Amazon is using two accelerator programs to get brands to sell on their platform. The Brand Accelerator Program is targeted at startup brands and helps them get off the ground by funding marketing efforts and other costly retail logistics like shipping and inventory management. Amazon asks for a level of long-term commitments from the brands, including sales minimums and advertising on the platform. Brands have to be able to do at least $1 million in sales during their first month on Amazon, maintain healthy inventories and have expertise in digital marketing and brand building. A minimum of 5% of all revenue earned on Amazon must be channeled into Amazon’s paid ads program. The Manufacturer Accelerator Program is aimed at retailers who can help drive Amazon’s private-label business by producing products. Sources are not sure when these programs began, but they have been in existence for a minimum of two years. Amazon does not provide participants with direct access to customer data.
Amazon is testing a new ad format that prompts users to review products they’ve purchased within display ads on Amazon.com by tapping on a number of stars to leave feedback. The ads will be sold to participating brands on a cost per review basis.
Amazon unveiled Amazon Moments, a cross-platform marketing tool that delivers instant rewards to customers who reach preset goals or complete desirable actions. Customers receive a digital message or email they can use to redeem their rewards, such as discounts on merchandise. Brands set the parameters and goals they want met.
Amazon has patented technology that would allow customers to pick up orders on their bus or train commute. The patent describes mobile pickup containers in public buses and trains where commuters could retrieve Amazon packages on the way to the office or home. Users select the option via an app.
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