Distribution September 2022
Retail Sales Flat
Retail sales were flat in July after rising a downwardly revised 0.8% in June and were up 10.1% year over year. Core retail sales, which exclude automobiles, gasoline, building materials and food services, rose 0.8% in July after rising 0.7% in June. The gains were led by nonstore retailers, up 2.7% for the month, followed by building materials, gardening equipment and supplies (1.5%) and miscellaneous retailers (1.5%). Online (nonstore) sales were up 20.2% from July 2021. The retail sales report covers about a third of overall consumer spending and doesn't include services, such as haircuts, hotel stays and plane tickets. Core retail sales correspond most closely with the consumer spending component of GDP.
The Home Depot
Q2 sales rose 6.5% to $43.79 billion, well ahead of expectations, as higher prices more than offset another drop in transactions. Comp sales rose 5.8%, including 5.4% in the US. Average ticket rose 9.1% for the quarter, but the total number of transactions fell 3%, the fifth consecutive quarter transactions have fallen after the huge surge in home-improvement activity during the first year of the pandemic. However, average ticket has increased each quarter, often by more than 10% year over year.
Q2 Conference Call with Analysts:
All merchandising apartments posted positive comps. Building materials, plumbing, millwork, paint and hardware were all above the company average.
Seasonal businesses posted positive comps in the second quarter, but underperformed expectations for the first half, driven by categories that turned in outsized gains during the pandemic. In addition, people began traveling more and doing more activities they had given up during the pandemic.
Comp average ticket increased 9% and comp transactions decreased 3.1%. The growth in comp average ticket was driven primarily by inflation across product categories, as well as demand for new and innovative products. On a three-year basis, both comp average ticket and comp transactions were healthy and positive.
Deflation from core commodity shaved 14 basis points off average ticket growth, driven primarily by lower lumber prices.
Big ticket comp transactions or those over $1,000 were up 11.6% compared to the second quarter of last year. They saw big ticket strength across many Pro-heavy categories.
Both Pro and DIY sales growth was positive, with Pro outpacing DIY. Weakness in DIY may have been due to seasonal issues, including the fact that the important spring selling season was significantly delayed by very bad weather.
Consumers and Pros are trading up around innovation. They also have a lot of products that help Pros finish the job faster and simplify the project for consumers. They do not see any significant trade down taking place.
Pros reported they still have healthy backlogs of work, and building materials and other strong Pro categories turned in double-digit comps.
Pro sales growth and growth in Pro comp ticket has been incredibly strong and they are increasing the size of their dedicated Pro sales and service staff in many metro markets.
Much of their previous business with Pros was fill-in. Now they are seeing a big increase in what they call Pro planned purchases, which often involve jobsite delivery. When Pros turn to them for planned purchases for a job, that results in a lot of unplanned purchases for that same project and also advanced order pickup.
Online and digital sales rose 12% to the highest sales dollar volume in company history. Sales have been boosted by enhanced search capabilities and improved Pro site experience and more robust fulfillment capabilities. More than 50% of online orders were fulfilled through stores.
They will launch Makita's new XGT 40-volt and 80-volt Max system of cordless equipment and tools in their outdoor power categories during the third quarter. The line uses one interchangeable battery and is exclusive to THD in the big box channel.
Total store count at the end of the quarter was 2,316 and selling square footage was 240 million square feet. Inventories were $26.1 billion, up $7.2 billion compared to the second quarter of 2021. Inventory turns were 4.5 times, down from 5.7 times last year.
Approximately half of the year-over-year increase in inventory reflects product cost inflation. Inventory also reflects deliberate investments and higher in-stock levels and stocking up for back-half events in response to continued global supply chain disruption, investment in new supply chain facilities and carryover of some spring seasonal inventory.
THD reaffirmed guidance for 2022 and expects sales growth and comp sales growth of approximately 3% for fiscal 2022. They expect comp sales to be stronger in the first half of the year than in the second half of the year.
They commented that the current environment is unique, with broad-based inflation, rising interest rates and continuing problems with the global supply chain.
They have not seen any noticeable impact from the slowdown in the housing market; consumers still have healthy balance sheets and are investing in their homes.
It is possible that some people who were contemplating moving are now planning to stay put and invest in the home they already own, rather than take on a higher-interest mortgage. Home price appreciation has gone up 30% to 40% in the last couple of years, which they believe translates to about $9 trillion of increased wealth in their core customer base of homeowners.
They launched Halloween in early August and the reception has been great. Halloween is not a huge category for them from a financial point of view, but it generates excitement and brings in traffic.
They do a lot of competitive pricing analysis and will stay competitive in the market. They have a deep understanding of almost all cost components for almost all of the products that they sell. They work with their suppliers whenever they see commodities drop to see what impact it will have on product costs.
When they got into the appliance business ten years ago when Sears was exiting, there was some concern about the fact that appliances have gross margins below company average. But because they don’t really own the inventory the return on capital has been extremely high. They will look for more opportunities to drive market share, drive operating profit dollar growth and drive return on invested capital.
The Home Depot joined the Billion Dollar Roundtable, (BDR), a nonprofit organization that promotes supplier diversity, excellence and best practices. The BDR is made up of US-based corporations that spend $1 billion or more annually with minority and woman-owned suppliers. The Home Depot says they are committed to cultivating a supplier base that creates long-lasting growth and mutual business success, while reflecting the diversity of their customers and strengthening their communities. In fiscal year 2021, the company spent $3.3 billion with diverse suppliers and put processes in place to ensure that a portion of the money that they spend on products and services across their entire supplier program makes their way to diverse businesses.
CEO and President Ted Decker will become Chairman of the Board October 1; current Chairman and former CEO Craig Menear will retire September 30.
Q2 sales fell slightly, to $27.5 billion from $27.6 billion and comp sales overall fell 0.3%, surprising analysts who had expected comp sales to increase. Comp sales in the US rose 0.2%. Lowe’s blamed the overall drop in comp sales on the fact that DIY represents 75% of sales.
Lowe’s forecast full-year total sales toward the bottom end of its range of $97 billion to $99 billion, and also expects comp sales in the lower end of prior forecasts for a 1% decline to a 1% rise.
Q2 Conference Call with Analysts:
Comparable average ticket increased 6.1% as higher Pro sales and product inflation drove higher average ticket. That was offset by comp transactions declining 6.4% after two years of what they described as “outsized growth.”
Pro sales have been growing in double-digits for nine consecutive quarters, but that’s not enough to make up for the drop in DIY sales because of the 75% DIY/25% Pro customer mix.
They have begun to see DIY growth shift to the interior of the store as spring seasonal products waned and DIY mentality shifted from big projects to maintenance and repairs and small improvements. They are also seeing a lot of interest in décor.
The very late spring that almost immediately transitioned to summer disproportionately impacted DIY sales. In addition, certain categories like patio and grills were impacted by unprecedented demand during the pandemic.
They are not seeing indications of trading down; to the contrary, there is continued strong demand for new and innovative products at higher price points.
Pro sales grew 13% for the quarter and 37% on a two-year basis. They’re seeing good response to their Pro loyalty program, MVP's Pro Rewards, which is designed to make every Pro feel like an MVP regardless of the size of their business.
Because time is money to Pros, they are pilot testing convenient fulfillment options, including a new Pro fulfillment center in Charlotte.
They are also testing systems improvements so they can offer same-day delivery for both Pro and DIY.
Sales on Lowes.com grew 7%, representing a sales penetration of nearly 10%.They plan to continue to invest in omnichannel capabilities because they believe there is lots of room for growth.
In Canada, Q2 performance lagged the US. The Canadian business is more heavily weighted towards lumber, so it disproportionately benefited from record high lumber prices last year.
They launched several new collections, including outdoor products from EGO and DeWalt that have further strengthened their portfolio of trusted programs like Bosch, Crescent, DEWALT, Eaton, Estwing, FastenMaster, FLEX, GRK, ITW, LESCO, Little Giant, Lufkin, Mansfield, Marshalltown, Metabo, SharkBite, Simpson Strong-Tie, SPAX, Spyder and Werner.
They are pleased with their inventory position. They are able to manage seasonal as they normally would and their in-stock levels are better than they've been over the last 2.5 years.
The quality level of the inventory is good, although there are still categories across the store that they want to see improve. They are continuing to work with their vendor partners and with their supply chain teams in order to expedite products to the store shelves. The quality level of inventory this year versus last year is dramatically better.
They have introduced many initiatives under their perpetual productivity improvement program (PPI). These programs are designed to improve operational efficiency and they are seeing strong results that are improving inventory visibility and stocking and reducing nonproductive hours the associates spend searching for product while also improving the customer shopping experience in-store and online.
They are investing an incremental $55 million in bonuses to hourly frontline associates this quarter; this cost of living bonus recognizes how important they are to Lowe’s success.
For a period of time they are also providing associates with an additional 20% discount on everyday household and cleaning items to help ease the burden of inflation impacting many of these products.
They are making other investments in their associates. They want to differentiate themselves from other retailers and earn the position of preferred retailer for employees.
They recently announced expanded scheduling options for full-time associates in order to improve their quality of life. Most full-time associates can now request a fixed four-day work week, fixed days off or even choose their preferred shift, providing them with predictability on their terms.
CEO Marvin Ellison believes that the biggest change that’s been implemented since he took over four years ago is a vigorous reliance on data to drive decisions about everything from merchandise to applying a rigorously analytical process to promotions. They also track their competitors in real time because they are committed to delivering everyday value.
Total revenue rose 8.4% to $152.86 billion, beating analysts' average expectation of $150.81 billion. While higher food prices drove average ticket and boosted comp sales at Walmart's US stores up 6.5%, higher discounting of general merchandise bit into profits. Walmart now expects consolidated net sales growth of about 5% for the third quarter and held to their previous forecast of 3% growth for comp sales for the remainder of the fiscal year.
Walmart will add a basic subscription to streaming service Paramount+ to the benefits of shelling out $98 annually to belong to Walmart+. Walmart hasn’t disclosed how many members have signed up, but a May survey from Morgan Stanley estimated about 16 million, up from about 15 million the previous November. While this partnership is new, Paramount and Walmart have worked together for years. Paramount has an office in Bentonville, Ark., dedicated to Walmart, which historically has been a big seller of its consumer products and home entertainment. Analysts note this move is part of Walmart’s strategy to move Walmart+ closer to Amazon Prime in terms of benefits and appeal, for a lower monthly membership that also includes grocery delivery.
Walmart is reportedly exploring the launch of a platform that will use social media influencers to help them and their 100,000 third-party sellers promote their goods and services online. According to trademark filings, "Walmart Creator" and "Walmart Creator Collective" would provide social media consulting and "the promotion of goods and services of others through influencers." Shopify and Amazon both have their own social media influencer services.
Q2 revenues rose 2.7% to $2.5 billion, compared to an 8.2% increase for Q2 last year. The approximately 3,600 Ace retailers who share daily retail sales data reported a 0.6% increase in comp sales. Estimated retail price inflation of 11.4% helped drive a 8.0% increase in average ticket. Comp transactions were down 6.9%.
Ace added 38 new domestic stores in the second quarter of 2022 and cancelled 12 stores. Their total domestic store count was 4,816 at the end of the quarter, up 87 stores from Q2 2021.
Inventories increased $329.7 million from Q2 last year due to the intentional build-up of inventory as a hedge against supplier shortages and to increase fill rates to Ace owners. In addition, the late arrival of spring weather in 2022 resulted in an overstock of patio and lawn and garden inventory that will be carried over into the 2023 spring selling season.
Ace Hardware recently opened their 105th new store in 2022. They expect to open at least an additional 60 more new stores by the end of the year. To keep pace with the growth, Ace plans to continue to invest in expanding their distribution network to house more inventory closer to the growing number of Ace stores and customers. They plan to add 4.4 million square feet of capacity to their distribution network by opening three new warehouses in the next five years. Ace added more than 2.5 million square feet in the past four years.
Q2 sales rose 19.6% to $3.8 billion. Grainger raised their guidance for profits and earnings for the full year.
Amazon is buying vacuum cleaner maker iRobot for approximately $1.7 billion, in an effort to add to their collection of smart home appliances and own more of the home space. iRobot sells products worldwide and is most famous for the circular Roomba vacuum, which would join voice assistant Alexa, the Astro robot and Ring security cameras and others in the list of smart home features offered by Amazon. Amazon's Astro robot, which helps with tasks like setting an alarm, was unveiled last year at an introductory price of $1,000 but its rollout has been limited and has received a lackluster response.
Faced with a slowdown in online shopping, Amazon has canceled, closed or delayed the opening of 49 delivery processing facilities across the US, representing more than 50.2 million square feet of warehouse space, according to logistics consultant MWPVL International. Despite the cutbacks, Amazon is moving forward with development of several new, fully automated fulfillment centers like the 4.1-million-square foot warehouse now under construction in Ontario, California, the biggest in the company's galaxy of delivery processing sites.
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