Distribution September 2020
Retail Sales Rise 1.2%
Retail sales inched up 1.2% in July after surging a total of 25.7% in May and June. Sales were up 1.1% from June 2019 and were 1.2% above the pre-pandemic pace in January 2020. Non-store sales, which include online sales, slowed further, inching up 0.7%, a possible indication that online shopping has leveled off. Sales at building and supply stores fell 2.9% in July after jumping a total of 13.7% in May and June. However, this category is still up 6.8% versus its pre-recession peak. Core retail sales, which exclude automobiles, gasoline and sales at building and supply stores and factor into calculations for GDP, rose 1.4% in July, which was above expectations. Core sales rose 6.7% in June.
Postal Service Holiday Surcharge
The USPS is warning businesses of new commercial shipping fees that start October 18 and run through December 27. Both UPS and FedEx have used peak pricing in the past, but this is the first time the USPS has implemented a holiday surcharge. The Post Office has been struggling to get expenses under control, and funding has been held up due to a dispute over mail-in ballots. President Trump has long pushed the USPS to charge more to shippers; analysts note that if the cost of shipping USPS rises, private companies like UPS and FedEx will be able to raise prices even more.
The Home Depot
Q2 net sales rose 23.4% to a record $38.1 billion, substantially ahead of estimates. Comp sales in the US grew by a record 25%. Comps grew in 20% or more in every week of the quarter.
Q2 Conference Call with Analysts:
Foreign exchange rates negatively impacted total sales growth by about $200 million. All 19 US divisions posted double-digit positive comps and the Canadian business saw record sales.
They made several adjustments in the second quarter, including taking a more localized approach to customer limits in stores. They are relying on store managers and field teams to monitor and implement limits as needed.
They extended weekly bonuses for hourly associates in stores and distribution centers.
They instituted a mask policy for all associates and customers in US stores and other facilities. They spent $110 million on associate and customer safety, most of that related to masks and PPE. That expense grew in the second quarter as they mandated masks for all associates in stores and warehouses, but they expect it to moderate in Q3.
Customers are very engaged with their homes and took on many projects in the second quarter, including building decks, painting, landscape work and home repairs and maintenance.
They have found no correlation between the number of CV19 cases in an area and sales performance.
Customers are consolidating the number of retailers they visit and are also blending physical and digital shopping more than ever before. Mobile and online sales doubled in the first quarter. The increased demand also creates challenges, particularly in fulfillment and delivery.
They were able to temporarily transition one of their recently opened market delivery centers (MDCs) to a direct fulfillment center (DFC) which primarily fulfill online orders. The investments they’ve made enabled them to compete the transition in just a few weeks.
They canceled their annual Memorial Day event and adjusted other spring events to avoid driving more traffic into already crowded areas in the store, such as garden and paints. They also removed most off-shelf merchandising displays to support social distancing. They will continue to have events and promotions, but they will be modified and more modest.
Teams have been very flexible and have worked cross-functionally. They altered marketing plans, social media product flow, product selection and space allocation.
They feel as if they have the best supplier partners in the business and they are working together to make real-time adjustments in assortments, for instance when they need to support in-stock levels for high demand items.
Over the quarter 13 of 14 merchandising departments poste double-digit comps, comp average ticket increased 10.1% and comp transactions increased 12.3%. Growth was driven by an increase in basket size and customers trading up to new and innovative items, not by seasonal sales.
Merchandise inventory fell by $1.2 billion over the quarter, driven by significant and steady demand. Inventory turns were 6.1, up from 5.1 in 2019.
Inflation and core commodity categories like lumber added 61 basis points to average ticket. However, this was somewhat offset by softer performance in certain indoor installation- heavy categories like kitchens and countertops.
There was strong sales growth for both Pro and DIY segments, with DIY growing more quickly than Pro sales. DIY customers are investing in both indoor and outdoor projects.
Existing customers set record levels of engagement and one third of new customers came back and bought something from another department.
Their mobile app saw record downloads and conversion rates grew significantly across all digital platforms.
Customers say they plan to continue to invest in their homes but THD is not making short-term projections due to the high degree of uncertainty surrounding the pandemic. However, they believe in the resilience of home improvement demand over the long run. With everyone spending more time living and working at home, people notice things that need to be done and think about improvements and changes they’d like to make that will make their home more functional and more enjoyable.
A quarter like Q2 provided a tremendous opportunity to engage customers across multiple platforms and increase loyalty.
Low-spend Pros were less impacted in Q1 and continued to accelerate purchases in Q2, and high-spend Pros are continuing to rebound. Permitting and job inspections are coming back online and there are places in the country where people have become more comfortable having service providers in their homes.
THD is opening three new distribution centers in Georgia over the next 18 months to support the growing demand for flexible delivery and pick-up options. One of them is a flatbed delivery center that is set to open in 2021 that will offer same-day and next-day delivery of bulk and oversized orders to both Pro and DIY customers.
THD plans to eliminate expanded polystyrene foam and polyvinyl chloride film from their private label packaging by 2023 and has pledged to produce and procure 335 MW of renewable and alternative energy capacity by 2025 as part of a series of new sustainability goals.
Q2 Sales grew 23.1% to $27.3 billion and comp sales increased 34.2% overall and 35.1% in the US. Online sales grew 135%.
Q2 conference call with analysts:
Sales were driven by consumer focus on the home, core repairs and maintenance and a shift from other discretionary spending.
They experienced unprecedented demand in many categories due to customers spending more time at home. They would not have been able to meet this demand without all the investments they’ve made in updating and improving their technology and systems.
DIY comps outpaced Pro comps in the quarter. Pro sales delivered strong comps in the mid-20s, with demand accelerating in May and remaining strong throughout the quarter.
Growth was balanced across the US, with positive comps of more than 30% in all 15 geographic regions and all three US divisions. Comp sales in urban markets outperformed remote and rural markets.
The 135% increase in online sales drove their online penetration to 8% of sales. They completed the replatform of their website to the cloud during the quarter, which enabled them to improve site functionality and sustain triple-digit growth without system interruptions.
In Canada, they posted positive comps that exceeded 20%, driven by a similar focus on the home as well as strong execution by their new leadership team.
Over the next 18 months they will ramp up delivery capabilities, opening 50 cross-dock delivery terminals, seven bulk distribution centers and four ecommerce fulfillment centers.
Through the first half of 2020 they’ve invested $560 million in incremental financing to support associates. They’ve also committed $55 million in grants to support minority owned and rural small businesses.
The measures they employed to increase store safety included removing product to free up floor space, adding signage and floor markings, creating social distancing ambassadors and using technology to monitor store traffic. In the second quarter they began requiring all frontline associates to wear masks and in mid-July mandated that all customers wear masks. They will provide free masks to customers who need them.
In June they launched JobSIGHT for Pros in partnership with Streem. The free augmented video chat service allows Pros to conduct virtual home visits with clients.
Pro Loyalty customers will receive a free one-year subscription to Home Advisor and a credit for an average of 10 free job leads, as well as access to webinars hosted by industry experts on how to grow their business.
They continue to see robust demand for cleaning products along with other home necessities and appliances. Home has transitioned from being the place we live to the schoolroom, office and recreation and fitness center.
They saw strong growth across all segments of power tools, along with growth in tool storage and mechanics tools, driven by the Craftsman brand.
Lowe’s is expanding their Pro brand offerings and launching Simpson Anchor Strong Tie’s framing hardware and fasteners during their Just for Pros customer acquisition event. This product will meet a critical need for Pros.
They are continuing to enhance their omnichannel capabilities and launched mobile check-in for curbside pickup in early July. In the second half of the year they hope to deliver online delivery scheduling, online order tracking, a dynamic customized homepage, simplified search and navigation and expanded online product offerings.
Customers are expected to stay closer to home this holiday season and focus on home improvement projects, including remodeling and space conversion, as well as holiday decorating and gifting.
Third and fourth quarters typically generate less revenue than second quarter due to the natural demand cycle in the home improvement sector. They expect promotional activity to increase modestly over the remainder of the year but not approach pre-pandemic levels.
They believe they have a big opportunity to increase their sales per square foot, which are still about $100 below Home Depot’s. They were very surprised to discover most stores don’t even have planograms in the system, making it impossible to properly merchandise and have a good replenishment strategy.
They have not delayed large projects; instead, they’ve accelerated the ones they believe can help them drive productivity and enhance their omnichannel strategy. Their price management system is helping them better understand how to drive benefits related to pricing.
If CV19 has affected sales, it has done so in a positive way; they see very strong sales in areas with outbreaks and an increasing number of cases.
Lowe’s is testing an in-house service center that will rent tools and equipment at their central Charlotte store. If the 4,000-square-foot department is successful, Lowe’s will duplicate the model across the country over the next few years, according to Fred Stokes, senior vice president of Pro Sales and Services. The Tool Rentals will be in newly constructed spaces that either expand existing stores or are located next door. They will rent everything from drain-cleaning and restoration tools to tools for sanitation and concrete. Merchandise including PPE and cleaning solutions will be available for purchases. The Tool Rental will include a fully equipped mechanic shop to service tools, space for on-site cleaning and areas for product demonstrations. Lowe’s is anxious to capture a bigger share of the $400 billion professional market. Lowe’s says there are certain tools that customers want to test before buying or that have limited use, making rental more attractive than owning, maintaining and storing them. Lowe’s reports that more than 70% of Pros rent tools.
Q2 sales rose 5.6% to $137.7 billion and comp store US sales rose 9.3%.
Walmart will be offering advertisers a new measuring tool that will give them on-demand visibility into how their campaigns are performing in-store and online. The tool is available for all Walmart display and sponsored products campaigns and comes from Walmart Media Group’s advertising analytics division. The performance dashboards include one for display ads and one for sponsored products campaigns, which feature pay-per-click ads that drive traffic to select items by ensuring they appear on the first page of search results and category and item pages.
Walmart reportedly will use Instacart to offer same-day deliveries to customers. Walmart and Instacart are testing the service in four California markets as well as in Oklahoma. Instacart recently raised $225 million to scale up operations.
Q2 revenue rose 35.1% to a record $2.28 billion. Comp sales in the US rose 35.3%, and online revenues skyrocketed 493%. Average ticket rose 18.2%.
Increases were seen across all departments, with power tools, outdoor power equipment and grilling showing the largest gains.
Up to half of all stores globally were closed at some point during the quarter. Ace Wholesale Holdings includes a large number of paint and decorating stores that were not considered essential. Nevertheless, their revenues rose $0.4 million.
Ace added 25 new domestic stores in the quarter and cancelled 27 stores. Their total domestic store count rose by 57 to 4,564 stores.
CEO John Venhuizen said the second quarter was the most difficult, unusual and yet most rewarding quarter in Ace’s history, and he was most pleased and impressed with how the Ace team delivered under incredible pressure.
In order to meet the unprecedented demand, they hired more than 900 additional warehouse specialists and plan to continue hiring more this quarter.
Ace International plans to expand into Mexico via franchising. Ace noted that Mexico has the world’s 11th largest economy and a very high rate of home ownership. The franchise program in Mexico will offer a variety of flexible store formats ranging from 300 square meters to 3,000 square meters and will offer both Mexican and global brands to meet the needs of the home improvement consumer. The primary area of franchise development for Ace will be in Mexico City with a projected opening of the first store in mid-2021. Ace has enlisted Feher Consulting, headquartered in Mexico City, to serve as the company’s exclusive franchise representative. Experience with retail or franchising and a minimum liquid investment of USD $2 million is a requirement for interested investors.
Amazon plans to create 3,500 jobs by expanding physical offices across the US. They’ll invest more than $1.4 billion in Dallas, Detroit, Denver, New York, Phoenix and San Diego to support Amazon Web Services, Alexa, Amazon Advertising, Amazon Fashion, OpsTech, Amazon Fresh and other elements of their business.
The once-presumed successor to Amazon CEO Jeff Bezos will retire early next year. Jeff Wilke, retail chief, has been a key player at Amazon for more than 20 years and had been thought to be the logical successor to Bezos. As the current CEO of Amazon’s Worldwide Consumer business, Wilke oversees the online marketplace, which accounts for the lion’s share of Amazon’s sales and employees. Wilke said he is not leaving for another job and he is as “happy with and proud of Amazon as ever.” He’ll be succeeded by Dave Clark, another 20-year veteran, who is currently svp of Amazon’s worldwide operations. Bezos said Wilke’s legacy will live on long and without him, Amazon would be completely unrecognizable today. None of the executives involved were available for comment.
Amazon will send more than 3,000 satellites into space to provide high-speed internet for developing countries. The program, Project Kuiper, was approved by the FCC. The low orbit satellites will provide constant high-speed internet access to developing countries and areas in the US and UK with poor service. Amazon must launch half of the permitted satellites by 2026 in order to retain their license; the remainder need to go up by 2029. Great Britain has also been licensed to deploy about 650 satellites to provide mobile phone and broadband service to remote areas of the UK.
Amazon ordered 1,800 electric vans from Mercedes-Benz for their European deliveries, part of Amazon’s commitment to build the most sustainable transportation fleet in the world.
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