Distribution March 2022

Retail Sales Rise 3.8%
Retail sales rebounded in January, rising 3.8% after falling a downwardly revised 2.5% in December. It was the largest increase since last March and took sales to their highest level since the government began tracking data back in 1992. Sales at building material and garden supply stores jumped 4.1%. Online sales saw the biggest gains, soaring 14.8% after dropping 8.7% in December when consumers returned to stores. Some of the overall increase was driven by inflation. Core retail sales jumped 4.8% after plunging in December. Core retail sales correspond most closely with the consumer spending component of GDP.
 
The Home Depot
THD reported record results. Q4 sales rose 10.7% to $35.7 billion; comp sales rose 8.1% overall and 7.6% in the US. Sales for FY21 rose 14.4% to $151.2 billion and comp sales for the year rose 11.4% overall and 10.7% in the US.
 
For FY 22 they are expecting both overall and comp sales to be “slightly positive.”  At the end of Q4 THD operated 2,317 retail stores and employed more than 500,000 people.
 
Q4 and FY21 Conference Call with Analysts:
 
Both Craig Menear and Ted Decker were on the conference call. It was Menear’s last call as CEO; Ted Decker takes over that role in March and Menear becomes Chairman of the Board. 
 
Craig Menear began the call by saying what a blessing and honor it has been to serve for the last 7.5 years as CEO and 25 years with the company. He has great confidence in the ability of Ted Decker and the leadership team to guide THD through its next phase of growth.
 
It was the first time fiscal sales topped $150 billion. Over the pandemic THD grew the business by more than $40 billion; it had taken them nine years (2009 to 2018) to grow the business by more than $40 billion. Menear credited extraordinary efforts by all 500,000 associates, a world-class leadership team and strong relationships with supplier and transportation partners.
 
For the fourth quarter, all regions and merchandise departments posted positive comps, although hardware, tools, lumber, flooring, appliances and garden were below the company average.
 
Q4 average ticket rose 12.3% but comp transactions dropped 3.8%. Ticket growth was driven primarily by inflation across several product categories, including core commodities.
Lumber prices remain volatile; during Q4 the price of framing lumber ranged from about $585 to more than $1,200 per 1,000 board feet, an increase of more than 100%. On a 2-year basis, both comp average ticket and comp transactions were healthy and positive. Big ticket comp sales (over $1,000) were up 18% compared to Q4 2020.
 
Sales leveraging their digital platforms grew 6% for Q4 and 9% for the year. About 50% of digital orders were fulfilled through the stores. Over the past two years sales from digital platforms have more than doubled.
 
Over the year they opened 7 new stores and added 14 new stores through a small acquisition, bringing the total store count to 2,317 and retail selling square footage to 241 million square feet.
 
Total sales per retail square foot were $605, the highest in company history. Merchandise inventories were $22.1 billion at the end of the quarter, an increase of $5.4 billion compared to FY20.
 
They are encouraged by the consistent and resilient demand for home improvement but the effects of inflation, supply chain dynamics and how consumer spending will evolve as CV19 restrictions ease are uncertain.
 
Regardless of conditions, their objective remain the same: to deliver the best customer experience in home improvement, extend their position as the low-cost provider and grow their market share.
 
It has been fifteen years since they switched their focus from new stores to productivity. Customer expectations continue to evolve and today’s customer has very little patience for any friction in their shopping journey.
 
Their goals are to grow the business to $200 billion in sales, which would represent incremental growth of $50 billion and deliver best-in-class operating profit dollar growth and return on invested capital.
 
They estimate that the total available market in North America is now more than $900 billion. They have invested in capabilities that let them pursue opportunities they would not have been able to pursue in the past that offer great growth potential.
 
They believe that consumers and Pros each represent about 50% of the available market and each group also represents about 50% of their sales. For Pros, they believe the addressable end market is more than $450 billion, and the addressable maintenance, repair and operations (MRO) space has expanded to more than $100 billion. So, even though they are the number one home improvement retailer, they are still a small part of a large and fragmented total market that has expanded significantly.
 
They cited an example of one Pro customer in the Dallas market that started with a few unplanned convenience purchases and grew to $100,000+ annually and has now grown to more than $300,000, thanks to all the expanded services and options they offer Pros.
 
Everything they hear from Pro customers would indicate that they are dealing with big backlogs of work and have more than they can handle. Menear noted it took quite a while to find someone to do simple projects around his home.
 
They believe it is equally important to make it easier for the DIY customer to do business with them. They have invested in technology and capabilities that deliver more relevant results including an improved and updated mobile app and improved signage and search engine capabilities. Customers now have multiple fulfillment options, an easier experience at checkout and more knowledgeable assistance. They believe all these improvements have led to customers increasing their spend.
 
Over the past four years they’ve seen a significant increase in sales driven by product recommendations.
They are totally focused on delivering a truly seamless experience regardless of which channel the customer chooses. The new fulfillment centers are not just about fulfillment, they are about improving the customer experience. They allow them to expand their assortment and inventory depth and offer faster and more reliable delivery options. In addition, they take pressure off the stores, so associates are free to focus on creating a better experience for the customer, which drives additional sales and customer satisfaction.
 
They believe they still have many opportunities to improve freight flow throughout the store and drive further space optimization.
 
Their outlook accounts for inflation and assumes unit sales will be relatively flat this year. There was a level of stability in the second half of 2021 that gave them confidence in projecting sales for 2022. Thus far this year transactions have been negative but are up on a two-year basis.
 
Particularly in Pro-oriented categories, when they get the goods, they fly off the shelves, and they are seeing a lot of substitutions. So, they know there is a lot of upside as the supply chain continues to improve.
 
Their goal of $200 billion in sales will be achieved “as soon as they can get there in a sustainable and profitable way.” The investments they have made and will continue to make in improving the customer experience for both DIY and Pro will get them there.
 
Every category has an elasticity curve which they watch closely; when lumber skyrocketed past a certain point, sales fell. They have not seen any dramatic shifts in customer patterns, but it is still hard to tell what normal will be because product moves off the shelves so quickly.
 
They did several hundred stores last year to improve
macro space allocation and get the facings and inventory depth to drive volume. They will do hundreds more this year. What they call their GSR initiative is working very well for them and helping them address the sales per square foot opportunity they have in their highest-volume stores.
 
They have seen some improvement in the supply chain with some easing of pressure at their ports but they believe constraints will continue in the near term.
 
They are hoping to hire 100,000 people for the busy spring season. They look at labor costs and wages every month on a market by market basis. Applications are up considerably. They have been working to bring product in for spring since it is their busiest season. Last year they delivered 5.2 inventory turns, higher than the pre-pandemic level of 4.9 turns.
 
They look at investment spending of about 2% of sales overall. They do robust testing scenarios on most capital investments so they can see results before they roll out.
 
They had planned to invest in about 150 new supply chain facilities when they were planning pre-pandemic. Many of those facilities will be complete by the end of the year but some will take longer due to CV19 constraints as well as their recent acquisition of HD Supply. They expect to have 85 of the planned 100 Market Delivery Operations (MDOs) fully operational by the end of the year; there are handful open today but rollout is taking longer because they need to determine how legacy HD Supply assets factor into their broader supply chain plans.
 
Other News:
 
THD will hire more than 100,000 workers across its stores and warehouses as they gear up for the key spring selling season when demand for home improvement products peaks.
 
A THD cashier in Arizona used fake bills to steal about $400,000 from the store over the past four years. The scheme was discovered in December when THD asked the Secret Service to investigate. The funny money was purchased on Amazon (Amazon sells “Prop Money” 100 dollar bills that look realistic for party decorations, gag gifts and movie, television and theater props.)
 
Lowe’s
Q4 sales rose 5.0% to $21.3 billion; comp sales rose 5%. FY21 sales rose 7.5% to $96.3 billion up from $89.6 billion for the prior fiscal.
 
Q4 and FY21 Conference Call with Analysts:
Comp sales rose 34.5% for the year and 35.2% in the US on a two-year basis. FY21 sales rose 6.9% on a comparable basis to $96.3 billion. About half of their sales growth in the second half of the year was due to product inflation.
 
They raised their sales outlook for 2022 to a range of between $97 and $99 billion, with comp sales ranging from down 1% to up 1%. They are forecasting a drop in unit sales offset by price. They are expecting unit sales to decline because over the past two years DIY customers made many purchases driven by the pandemic that they are unlikely to continue to make at that volume.
 
They believe they are well-positioned to gain a disproportionate share of the home improvement market. Higher commodity inflation than they planned for will push sales up slightly in the first half.
 
Comp average ticket rose 9.4% with higher sales in appliances, flooring and seasonal and outdoor living and 90 basis points of commodity inflation in lumber and copper.
 
Sales at Lowes.com grew 11.5% on top of the 121% growth compared to Q4 2020 which represents a two-year comp of 147% and nearly 11% sales penetration. While pleased, they believe there is tremendous upside to online sales.
 
Their Total Home Strategy continues to gain momentum and they are growing their share of wallet with both Pros and DIY customers.
 
Growth was broad-based across all product categories and customer segments both in-store and online. They delivered positive comps in all three merchandising divisions and across both Pro and DIY customers. Twelve of 15 merchandising departments delivered positive comps and all 15 departments grew more than 18% on a two-year basis.
 
Seasonal, outdoor living and lawn and garden delivered outstanding results as customers continue to enhance outdoor living spaces.
 
Pros who leverage their Loyalty and Credit offerings spend 300% more than Pros who don’t. They are excited about the upcoming launch of their MVPs Pro Loyalty program and will be giving updates on this critical initiative throughout the year. Their Pro business accounts for 22% to 25% of sales and is delivering strong growth with 23% comps for the quarter and 54% on a two-year basis. Their Pros tell them business is better than they’ve ever seen it and they already have projects that will carry over into 2023.
 
They are actively piloting several GIG Network Solutions including partnering with Instacart in several markets for same-day DIY home delivery.
 
Their market-based delivery model means that big bulky products go from the supply chain directly to customers, replacing the old and highly inefficient store delivery model.
 
Continuing to expand their market based delivery system will free up space in their 10,000+ square foot back rooms, which on average are considerably larger than their competition’s. They are also testing options to provide greater install fulfillment and expanded delivery alternatives for both Pro and DIY customers.
 
CEO Marvin Ellison shared his perspective on the home improvement market. They are encouraged by the strengthening millennial household formation trends that will support home buying and renovation in the coming years. Other favorable trends include baby boomers increasingly preferring to age in place and the continuation of remote work for some employees. More than 50% of homes in the US are more than 40 years old and will continue to require investments for upkeep. Approximately two-thirds of Lowe’s annual sales come from repair and maintenance activity.
 
Innovative battery-powered products are helping them build on their number one position in outdoor power equipment. This category grew more than 37% for the quarter and more than 118% on a two-year basis.
 
Comps were very strong in the Building Products division, with broad-based and balanced growth. They will be adding a full range of CertainTeed roofing, insulation and gypsum products this year.
 
They continue to build out their Pro Power Tool program with the introduction of DeWalt’s new POWERSTACK battery technology. They have a strong Pro brand arsenal that includes great brands like Bosch, Simpson Strong-Tie, Werner and Metabo.
 
They will be leaning very heavily into national brands on the Pro side. They believe that one of their strategic mistakes was relying too much on private label brands, particularly in fall-related categories.
 
They are continuing on their journey of being driven by every-day competitive pricing rather than promotions.
 
They are expanding their Lowes.com assortment to meet customer design and lifestyle needs. Their new Origin 21 patio collection includes replacement cushions made with 100% recycled plastic bottles. Their Livable Home collection offers products that help customers adapt to changing mobility needs as people age in place.
 
They are leveraging their Lowe’s University In-Store Training Labs to provide the ongoing training that associates need to build skills and confidence and progress in their careers. Since 2018 they have invested well over $2 billion in incremental wage and equity programs for frontline associates. They expect to be even better positioned than last year from a hiring perspective.
 
They are working on more than twenty Product Improvement Initiatives (PPI) to improve store operations. They have launched a new Store Inventory Management System (SIMS) across all stores that gives associates real-time visibility to inventory in their stores, which will eliminate thousands of hours of non-productive time.
 
At year end, inventory was $17.6 billion, up $920 million from Q3 and consistent with their efforts to land spring products earlier. Their new coastal holding facilities on both the East and West coasts are allowing them to land import products early which elevates inventory on a temporary basis but greatly improves sell through.
 
Other News:
 
Lowe’s launched an exclusive home décor brand targeted at millennials called Origin21. The line reportedly features clean lines, soft curves and natural and recycled materials. Products will initially include patio furniture and home décor accents lighting, seasonal, outdoor living and lawn and garden.  They’ll be available at Lowe’s stores nationwide and at Lowes.com.
 
Walmart
Q4 sales rose 7.9% to $153 billion and comp sales in the US (excluding fuel) rose 5.6%. FY21 sales grew 9% to a record $568 billion.
 
Comparable sales rose 5.6% in the U.S. for the crucial holiday quarter against a tough comparable from a year ago when the increase in comp sales was 8.6%. Customer transactions were 3.1% higher during the quarter and average ticket was up 2.4%. Meanwhile, Sam's Club recorded a 10.4% jump in comparable sales off a 7.0% increase in transactions.
 
Walmart noted that US sales benefitted from stores being stocked and stronger foot traffic. Transaction volume rose 3.1% in Q4, helped along by Walmart administering CV19 vaccines.
 
Supply chain costs were more than $400 million higher than expected at the beginning of the quarter. Walmart had to hire many more associates than planned for in order to cover the huge increase in sick employees caused by the rapid spread of the Omicron variant.
 
Walmart’s ecommerce growth slowed during Q4 as more sales shifted to physical stores. Long-time exec Tom Ward will take over the reins of Walmart’s ecommerce business. They are focused on faster delivery and increasing the volume of products listed by third-party sellers.
 
Walmart is projecting slower growth this year along with lower costs associated with CV19. Comp US sales are projected to rise slightly more than 3%.
 
Ace Hardware
Ace stores nationwide hosted BBQ Kick-Off parties to demonstrate the latest from Weber, Traeger and Big Green Egg. Live grilling and new feature demonstrations took place in early February at participating stores. BBQ experts demonstrated the latest innovations including what to cook and how to cook it. Ace offers Ace Rewards members free assembly and delivery on all grills $399 and above. A report for Total Retail named Ace the fastest-growing BBQ grill retailer in America between 2019 and 2020.
 
Amazon
Amazon missed expectations for Q4 revenue but significantly beat earnings estimates. Revenue for Q4 rose 9% to $137.46 billion. Revenue grew 15% in Q3, 27% in Q2 and 44% in Q1. Excluding currency, net sales rose 10% in Q4. Full year sales rose 22% to $469.8 billion.
 
Amazon subscription services revenue rose 16% to $8.12 billion. Ad sales grew 33% to $9.7 billion. AWS revenue rose 40% to $17.8 billion as the cloud service division that was previously run by now CEO Andy Jassy continued on a solid growth curve.
 
Amazon had previously announced that they could have no operating profit at all in Q4 but got a big boost from their investment in Rivian electric-vehicle startup.
 
Amazon said costs over the holidays were driven up by several factors, including labor supply shortages and inflationary pressures which persisted into the first quarter. Shipping costs grew 10% to $423.7 billion in Q4, a big slowdown in growth from Q4 2020.
 
For Q1 Amazon projects revenue growth between 3% and 8% compared to Q1 2021.
 
Amazon raised the price for their popular Amazon Prime subscription, increasing the full-year subscription by $20 to $139 and the monthly subscription cost $2 to $14.99. They cited rising wages and transportation costs as well as expanding Prime perks. Amazon increased Prime’s fee from $99 to $119 in 2018.
 
Amazon plans to more than double its base pay cap for US employees to $350,000 from its previous maximum salary of $160,000 for US employees. Amazon will increase the overall compensation range for most jobs globally. Last year Amazon increased the average starting wage for US operations staff to more than $18 an hour.

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