Distribution September 2016
RETAIL SALES FLAT
Retail sales were essentially flat in July after rising an upwardly revised 0.8% in June and were up 2.3% year-over-year. Online retail sales rose 1.3% after rising by the same amount in June, and were up 10.6% over the first six months of the year compared to 2015. Core retail sales, which exclude automobiles, gasoline, building materials and food services, were flat in July after rising a solid 0.5% in June. Core retail sales correspond most closely with the consumer spending component of GDP. Sales of building materials fell 0.5% after rising 3.9% in June. Results were well below analysts’ expectations, and indicate that consumer spending could moderate in the third quarter. Retail sales account for about one-third of all spending, with services making up the other two-thirds.
THE HOME DEPOT
Q2 sales rose 6.6% to a record $26.47 billion. Comp store sales rose 4.7% overall and 5.4% in the U.S. For fiscal 2016, they expect sales to grow by 6.3% and comp sales to grow 4.9%.
From Their Q2 Conference Call with Analysts:
All three U.S. divisions posted positive comps for the quarter, with the Western region leading the way. All 19 U.S. regions and top 40 markets posted single to double-digit comps.
Total comp sales grew 2.2% for the quarter, and comp average ticket increased 2.5%. Ticket growth was driven by an increase in the number of items per transaction, an indication that project activity is picking up. Average ticket was positively impacted from some commodity price inflation, mainly in building materials and lumber.
Transactions for tickets over $900, which account for about 20% of U.S. sales, rose 8.1%, driven by appliances, HVAC and roofing.
Tools outperformed the company average, as did lumber, plumbing, décor, indoor garden, building materials and lighting.
Pro sales grew faster than average, led by their high spend Pro customers. Power tools and power tool accessories outperformed the average.
Their online business grew strongly with double-digit traffic growth and better conversions. Mobile and tablet accounted for more than half of their traffic. They are enhancing the functionality in mobile with features like larger and more clear product images, live mobile chat and a simplified checkout experience.
Approximately 42% of online orders are picked up in store, and nearly 90% of returns are processed in store.
For the third quarter they will be introducing the DeWalt FlexVolt system to Pro customers. They are also introducing some other smart products, including a smart Ryobi garage door opener.
A mistake in one of their internal programs caused them to under-order some inventory during the quarter; that mistake has been corrected.
They are very pleased with sales on their private label credit cards, particularly their Pro card. New Pro accounts are up double digits, well ahead of their expectations.
They are testing a program that allows customers to shop the Interline assortments inside 20 Home Depot stores.
When a basket contains 40 to 80 items, you know the customer is doing a project. Those type of baskets have been increasing.
There were promotions they did last year that they did not repeat this year. They are increasingly focused on providing everyday value.
Sync is the biggest initiative they have in place to improve their in-stock, inventory productivity and logistics costs. Sync is currently in 12 of their 18 RDCs and handling about 60% of the dollar volume that goes through their RDCs. They are seeing improved transportation costs and smoother demand flow and are working with their suppliers to continue to improve those benefits throughout the supply chain. Between 2011 and 2015 the supply chain has driven 68 basis points of gross margin expansion, so has been very productive.
Their new Customer Order Management System (COM) is now fully deployed in all U.S. stores. They expect the rollout of Buy Online Deliver From Store (BODFS) to be completed by the end of the fiscal year.
Q2 revenue rose 5% to $18.26 billion, well below analysts’ expectations. Comp store sales rose 2%, less than half of the 4.2% increase analysts were expecting. Lowe’s attributed the lackluster results to their acquisition of Canadian home improvement chain Rona on May 20. It was the first quarter Rona was included in their results.
Lowe’s now expects revenue for 2016 to increase about 10%, including an extra week in the fiscal year. Same-store sales are expected to climb about 4%. Lowe’s cut their earnings outlook for the year from $4.16 per share to $4.11. They expect Rona to contribute 4% to sales growth, and estimate that the 53rd week in the fiscal year will add 1.5% to total sales.
From Their 2016 Conference Call with Analysts:
The 2% growth in comp store sales in the quarter was driven primarily by a 1.7% increase in average ticket. U.S. stores achieved comp sales increases of 1.9%, with strong performance in the south and west regions compensating for northern regions affected by unusually cool weather that impacted outdoor projects.
Total costs per transaction grew 3.7%, with RONA accounting for about 75% of the increase. Total average ticket grew 1.6% to $68.91. The ticket increase was driven by the addition of Rona and an increase in comp sales and new stores. The number of comp transactions grew 0.3%.
They posted positive comps in 10 of 13 product categories, below their expectations. They attributed above average comps in kitchens to a change in the way they do store displays. They have moved kitchen solutions, including cabinets and countertops, so they are immediately adjacent to appliances.
The timing of spring impacts the first half of their year. This year spring kicked off with robust demand for outdoor projects as customers took advantage of favorable weather. In the second quarter, there was more strength in indoor projects demand, with strong performance in lumber and building materials.
Their outdoor/seasonal business typically contributes about 40% of overall sales, which is why adverse weather disproportionately affects them.
Their Pro business continues to perform well above the company average. They have made strategic investments to build deeper relationships with Pro customers. There was almost a 400 basis point gap in Pro comps compared to DIY comps. Pro is now approximately 30% of their overall volume, and continues to grow at a faster rate than their DIY business.
They are working closely with field-based merchandising teams to identify local market opportunities and brands that will appeal to Pro customers.
The LowesForPros.com website was relaunched during the second quarter and is gaining traction.
They expect home improvement spending to continue to outpace consumer spending overall. They expect the strengthening housing market and continued appreciation in home values and incomes to motivate people to spend money on their homes.
Tools and hardware benefited from increased project activity from both their DIY and Pro customers. They are improving their tool brand assortment and adding
exclusives like Hitachi and Bostich in pneumatics. They have also reintroduced Marshalltown, the leading supplier of cement masonry tools to Pros; their products will soon be rolling out to stores. They are also utilizing Account Executive ProServices, or AEPs, who work with larger regional customers.
They launched their new Lowes.com website with optimized functionality and display for touch-screen devices to improve the mobile experience, improved product and content recommendations, refined search algorithms, improved click-to-chat capability, larger product images and expanded product views, including video content. Predictably, the restaging of the website caused temporary disruption as customers adjusted to the new site, but now they are seeing improved performance and getting good customer feedback. Lowes.com comp sales grew 14%.
Their interior and exterior project specialists are now the critical element of their omnichannel strategy. Exterior project specialists are currently available in all U.S. stores, and they are expanding their interior specialists program.
They continue to utilize media mix modelling to optimize every dollar, and migrate from print advertising and analog into digital. They have a very strong social media footprint on Snapchat, Facebook and Instagram, and drove 27 million impressions on social media alone in the second quarter.
The integration with Rona is being handled by Richard Maltsbarger, Lowe’s head of International. Their initial focus has been on getting the right leaders and right structure in place as they shape a new culture to compete in Canada.
Q2 sales rose 0.5% to $121 billion; net income rose 8% to $3.8 billion. Comp store sales rose 1.6% and the number of transactions in U.S. stores was up 1.2%.
Walmart acquired Jet.com for $3 billion. The online shopping site described as a “digital general store” was founded in 2014. Walmart hopes the acquisition will help them reach a broader range of shoppers and become more competitive with online behemoth Amazon. Walmart CEO Doug McMillon has said that their online growth is too slow. Jet CEO Marc Lore will become Walmart’s CEO of ecommerce, responsible for both Walmart and Jet brands in the U.S.
Walmart’s online sales of $14 billion last year accounted for a scant 3% of their top line. Last year Amazon’s revenues excluding Amazon Web Services grew 20% to $100 billion. Last summer Amazon passed Walmart in terms of market value, and today, valued at $350 billion, is about 60% larger. Jet.com started out as a membership site with a $50 fee, but quickly dropped that model. Analysts say buying Jet.com isn’t going to catapult Walmart into first place, but might make them more competitive with Target. According to Walmart, Jet.com will remain a separate brand.
Walmart is trying out a new scheduling system in hundreds of Neighborhood Market test stores that is designed to give employees more control over their hours. Workers are unhappy about unpredictable work schedules. Under the changes, some full-time and part-time employees would be able to have fixed schedule for up to six months. Most employees would stay on the current scheduling, which is three weeks advance notice of schedules. Walmart is the country’s largest private employer so their programs can be industry changing. After they announced in 2014 they would raise minimum wage for store employees, other retailers followed suit. Many retailers use a system called on-call scheduling, in which employees are told to come in or stay home with little notice.
Sears Holdings posted another quarterly loss, with revenue dropping 8.8% to $5.66 billion. Comp store sales fell 7% and Kmart’s comp store sales dropped 3.3%. Revenue was also affected by a decline in the number of stores in operation. Sears accepted a $300 million debt-financing offer from CEO Edward Lampert’s hedge fund. Lampert took over the company in 2005 and merged it with Kmart; his fund controls a large percentage of Sears’ outstanding shares. Analysts continue to question how long Lampert can keep Sears afloat.
Sales increased 3% in July compared to July 2015. Growth included a 4% contribution from Cromwell Group, acquired September 1, 2015. Excluding acquisitions, organic daily sales fell 1%, driven by a 1% drop in price and flat volume. Sales in the U.S. fell 2% and sales in Canada fell 19%, or 14% in local currency. The month of July 2016 had 20 selling days, two fewer than the previous year. The 2016 third quarter will have 64 selling days, the same as the 2015 third quarter.
DG Macpherson will succeed Jim Ryan as CEO effective October 1. This is part of the multiyear succession process that will be completed when Macpherson takes on the Chairman role as well when Ryan retires. Jim Ryan is only the fourth CEO in Grainger’s 89-year history, and he will stay on as Chairman of the Board for now. Macpherson joined Grainger in 2008 after working closely with them for six years as a partner and managing director at Boston Consulting Group. No other executive changes are planned at this time. No date was given for Macpherson taking over as Chairman.
From Amazon’s Q2 Conference Call with Analysts:
Amazon’s North American revenue grew 28% to $17.7 billion. Marketplace sales now account for 49% of Amazon’s total number of units sold. Amazon sales account for 60% of all ecommerce sales.
Amazon wants to make sure that growing fulfillment costs don’t take a bite out of their holiday quarterly earnings this year as happened last holiday. Amazon is adding 18 warehouse facilities in the third quarter to get ready for the holiday surge; last year they added six.
Amazon Web Services saw year-over-year growth of 58% on annual revenue of more than $12 billion; they also reported 35% operating margins. Analysts say that Amazon’s results show that eventually there will be only two SuperCloud vendors: Amazon and Microsoft.
For Q3 they expect net sales to grow 22% to 32%, to between $31 and $33.5 billion. Their guidance includes results from Amazon Prime Day.
They’ve added 11 metro areas to Prime Now, bringing the total metros with Prime Now to more than 40. They said Prime Now is a very hard service to deliver and make money on, but they know customers love it, and they are looking at the long term and expanding their vast global fulfillment network.
They described Amazon Prime as the “flywheel” of revenue growth acceleration. They will continue to expand Prime benefits globally. They do not comment on the number of Prime members, but say there is plenty of upside potential.
They approach China as a way to offer Chinese customers access to authentic international brands through Amazon GlobalStore. They are seeing good results in China.
Amazon has partnered with the UK government to test how practical it would be to use drones to deliver small packages to shoppers. The UK has given Amazon permission to test drones carrying deliveries weighing five pounds or less. If the test goes well, Amazon will start drone delivery under the name Amazon Air.
Amazon unveiled its first branded Prime Air cargo plane, Amazon One, at the annual Seafair Air Show in Seattle. It’s one of 40 jetliners that will make up their own air transportation network, part of Amazon’s push to take more control of its delivery process. Amazon’s parcel volume was an estimated 1 billion packages in 2015. Amazon is leasing the jets; eleven of the planes are already delivering packages for Amazon Prime customers. Amazon says they will continue to use UPS, FedEx and the USPS to deliver packages as well.
Amazon is looking to convert a large proportion of their campus recruitment interviews into online tests, saving time and money for recruiters and candidates. Amazon started testing the idea last year with their intern candidates and found that it reduced the number of interviews from around four to one.
Target is once again selling Amazon’s Kindle e-readers, Fire tablets and Fire devices online, and they are expected to return to Target stores in October, in plenty of time for the holiday season. Target stopped selling Amazon devices in 2012, due to concerns that the items would help draw customers to Amazon, and away from Target. In 2001, Target outsourced their ecommerce business to Amazon, because at the time online shopping was not seen as part of their core business. That partnership continued until 2011.
Amazon may be considering drive-up grocery hubs where customers could come and pick up their online grocery orders. Testing sites have been identified in Seattle and California. Amazon has been close-lipped about the venture, but local news outlets identified the company behind “Project X.”
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