Author: Chad Symens

The May PMI registered 55.4 percent, an increase of 0.5 percentage point from April’s reading of 54.9 percent, indicating expansion in manufacturing for the 12th consecutive month.  The New Orders Index registered 56.9 percent, an increase of 1.8 percentage points from the 55.1 percent reading in April, indicating growth in new orders for the 12th consecutive month.  The Production Index registered 61.0 percent, 5.3 percentage points above the April reading of 55.7 percent.  Employment grew for the 11th consecutive month, registering 52.8 percent, a decrease of 1.9 percentage points below April’s reading of 54.7 percent.  The Supplier Deliveries Index registered 53.2 percent, 2.7 percentage points below the April reading of 55.9 percent.  Comments from the panel reflect generally steady growth, but note some areas of concern regarding raw materials pricing and supply tightness and shortages.

Source: Institute for Supply Management 

May 29, 2014

Fred’s wants to be what it calls “the convenient small box store of choice” and to achieve that goal, it has embarked on a two-pronged strategy focused on general merchandise and pharmacy.

Neither business is new for Fred’s, an operator of 704 stores throughout the Southeast, but the need for a new approach to serving shoppers in the digital age was heightened after the company reported weak sales and profits for the first quarter ended May 3.  Sales declined to $498.3 million from $501.5 million and same store sales dropped 1.9% on top of a prior year decline of 1.3%.  The company’s first quarter profits of $6.1 million, or 17 cents a share, were roughly half the $11.4 million, or 31 cents a share, profit the company earned the prior year.

There were some legitimate reasons for the weakness, as have been cited by numerous other retailers, but Fred’s reasons went beyond the unusually cold weather and a tepid economy to include competitive promotions, issues related to the timing of tax credits and what it referred to as extraordinary inflationary pressures on generic drugs combined with third-party payers reluctant to increase reimbursement rates.

“Realizing that customers’ shopping habits are changing faster than ever, we recognize that we need to adapt to these changes and meet customers’ needs on their terms,” said Fred’s CEO Bruce Efird.  “Fred’s new strategy takes into consideration the ongoing emergence of internet shopping.  This trend continues to reduce trips to conventinal brick-and-mortar stores, but, at the same time, potentially expands the number of convenience, need-based shopping trips.  We will be marketing the diverse categories we carry compared with other small box competitors to emphasize convenience, using a new marketing and signage strategy.”

Rather than add e-commerce capabilities to its website, Efird said the front end of Fred’s stores will be re-merchandised with power displays and pallets, along with a faster checkout configuration, all focused on ease of shopping and designed to emphasize the advantages of shopping at Fred’s 15,000 sq. ft. stores.  The changes are meant to better position Fred’s to serve more of the need-based categories and provide customers with an easier and more convenient shopping experience.

“We are now engaged in a robust reworking of our current pharmacy distribution agreement, with benefits expected to begin in the second half of 2014 and with the full impact anticipated in 2015,” Efird said.  “We will be making the general merchandising changes over the balance of this year, which include cleaning out unproductive SKUs and exiting categories that do not align with Fred’s enlarged convenience model.  The costs of these branding, marketing and merchandising strategies will be finalized by the end of the second quarter.”

The company expects to fully implement a new marketing campaign by mid-July with further plans calling for the new front end, adjacencies and fixtures to be substantially completed early in the fourth quarter.

Source: Retailing Today

May 27, 2014

Target will test same-day delivery in three markets as the online shipping war among retailers continues to gain momentum.  Target will launch a $10 rush delivery pilot in June in the Minneapolis, Boston and Miami markets, offering guests the ability to order as late as 1:30 p.m. in the afternoon and receive a delivery of qualifying items between 6 p.m. and 9 p.m. the same day, the company stated in its recent quarterly call with analysts.

Later in the year, Target plans to rollout standard shipping from 136 stores in 38 markets across the country.  By leveraging the store network as fulfillment centers, it can offer faster, standard shipping – typically one to two days – and provide access to store only items not previously available from Target.com.  The retailer stated that it will continue to monitor results to determine further rollout plans.

The retailer also stated that it continues to see “encouraging results” from its recent rollout of in-store pickup of digital orders.  These orders make up about 10% of Target’s digital transactions and when guests pick up their items, more than 20% of the time, they take the opportunity to shop the store and spend much more than the average basket, the company stated.  In the first quarter, Target expanded the number of SKUs eligible for in-store pickup to more than 60,000, including some shelf stable grocery items.

Source: Retailing Today

May 29, 2014

Solid sales growth at Costco during the second quarter and a 6% same store sales increase at U.S. clubs did not translate into strong profits for the warehouse club operator whose earnings fell shy of analysts’ estimates.

Costco’s worldwide revenues for the 12 week period ended May 11 increased 7.1% to nearly $25.8 billion and consisted of product sales that increased 7.1% to slightly more than $25.2 billion and membership revenue which rose 5.6% to $561 million.  Total company same store sales increased 4% and consisted of a 5% U.S. comp increase and a 3% international increase.  Both figures were negatively affected by lower gasoline prices and foreign exchange.  U.S. comps increased 6% excluding the negative effects of gas prices and international comps increased 8% on a constant currency basis.

Costco saw its profits increase 3% to $473 million, or $1.07 a share, from $459 million, or $1.04 a share.  The consensus among analysts was that Costco would earn $1.09 a share.

Costco ended its second quarter with a total of 655 warehouses worldwide, including 464 locations in the United States and Puerto Rico, 87 in Canada, 33 in Mexico, 25 in the United Kingdom, 19 in Japan, 10 in Taiwan, 10 in Korea, six in Australia, and one in Spain.  The company plans to open as many as eight new warehouses during the second half of its fiscal year.

Source: Retailing Today

May 29, 2014

Production of apartments and condominiums showed positive growth in the first quarter of 2014, according to the latest Multifamily Production Index (MPI), released today by the National Association of Home Builders (NAHB).  The index increased three points to 53, which is the ninth consecutive quarter with a reading of 50 or above.

The MPI measures builder and developer sentiment about current conditions in the apartment and condominium market on a scale of 0 to 100.  The index and all of its components are scaled so that any number over 50 indicates that more respondents report conditions are improving than report conditions are getting worse.

Th MPI provides a composite measure of three key elements of the multifamily housing market: construction of market-rate rental units, low-rent units and “for-sale” units, or condominiums.  In the first quarter of 2014, the MPI component tracking builder and developer perceptions of low-rent units increased one point to 48 and for-sale units jumped eight points to 54.  Meanwhile, the index tracking market-rate rental properties slipped one point to 59, but has remained consistently above 50 since the fourth quarter of 2010.

“Developer confidence in market-rate units has been pretty stable for quite some time,” said W. Dean Henry, CEO of Legacy Partners Residential in Foster City, California, and chairman of NAHB’s Multifamily Leadership Board.  “Now we’re really starting to see confidence in the condo market start to catch up – a segment that had been delayed in its recovery – along with the single-family market.”

The Multifamily Vacancy Index (MVI), which measures the multifamily housing industry’s perception of vacancies, dropped one point to 37.  With the MVI, lower numbers indicate fewer vacancies.  The MVI improved consistently through 2010 and has been at a fairly moderate level since 2011 after peaking at 70 in the second quarter of 2009.

“The MPI shows stable production of apartments and condos, which is what our forecast calls for,” said NAHB Chief Economist David Crowe.  “In 2014, we expect multifamily starts to grow about 6 percent over 2013, to about 326,000 units.”

The MPI and MVI have continued to perform well as leading indicators of U.S. Census figures for multifamily starts and vacancy rates, providing information on likely movement in the Census figures one to three quarters in advance.

For data tables on the MPI and MVI, visit www.nahb.org/mms.

Source: National Association of Home Builders 

May 27, 2014

Last week: The Conference Board Leading Economic Index continues to point toward more solid footing for the U.S. economy.  Investors remain skeptical.  After the drop in bond yields last week, yields moved very little this week.  Are consumers equally skeptical?  This week’s consumer confidence report will show whether consumers remain in a “wait and see” mode.  Of course, consumers pay more attention to changes in the labor market than the bond or stock market.  Next week, the latest news on job growth may live up to consumer expectations and help convince them that it is time to finally implement some long delayed replacement purchasing.

The Conference Board Consumer Confidence Index, May

The data point to an improving economic environment.  Are consumers buying it?  Confidence, especially consumer expectations, was higher in April than at the start of this year.  Did it move higher in May?

Personal Income and Outlays, April (Bureau of Economic Analysis)

Income growth has generally been in a range of about 0.2 to 0.3 percent.  Spending was even slower through March but might have improved in April, as the severe winter weather lets up.  The bigger issue is whether job growth and some rise in wages will be enough to move above that 0.2 to 0.3 percent range.

Question of the Week: Is the housing recovery running out of steam?

The housing recovery certainly ran into more than a simple speed bump.  Consider that sales of existing homes peaked in July of 2013.  But that’s not all.  Sales peaked in different parts of the country nearly simultaneously.  That’s not a typical pattern.  Moreover, the drop in sales ran counter to all computer models.  Clearly something happened to change the trend, and in an unusual manner.  Perhaps the rise in mortgage rates, as well as the run up in home prices resulted in a pull back.  Another factor may have been the slowing in sales of distressed homes – foreclosed homes put on the market.  A third factor had to do with the number of sales to those buying a home to rent out or renovate and resell (so-called flip sales).

Mortgage rates have actually retreated a little from the peak last year.  The supply of distressed homes has continued to dwindle, though the pace has slowed.  On the other hand, with job gains averaging almost 200,000 per month over the past 12 months, and expected to continue, if not accelerate a little, demand for homes could well start moving up.

One more factor affects sales of homes: getting mortgage approval.  This likely did not impact sales last year as lending conditions remained restrictive.  Many lenders were still dealing with nonperforming loans.  This problem has diminished to the point that some lenders have eased credit conditions.  In sum, fewer diminished sales, fewer flip sales, more sales to the newly employed, mortgage rates not moving up (at least for now), and eased lending conditions should all combine to allow home sales to start moving higher.  In turn, more demand would send more crews out to build more new homes.  So, no, the housing recovery is not running out of steam.  It did hit a speed bump.  But that speed bump is now in the rear view mirror.

Source: The Conference Board

May 27, 2014

The Conference Board Consumer Confidence Index, which had decreased in April, improved moderately in May.  The Index now stands at 83.0, up from 81.7 in April.  The Present Situation Index increased to 80.4 from 78.5, while the Expectations Index edged up to 84.8 from 83.9 in April.

Says Lynn Franco, Director of Economic Indicators at The Conference Board: “Consumer confidence improved slightly in May, as consumers assessed current conditions, in particular the labor market, more favorably.  Expectations regarding the short-term outlook for the economy, jobs, and personal finances were also more upbeat.  In fact, the percentage of consumers expecting their incomes to grow over the next six months is the highest since December 2007 (20.2 percent).  Thus, despite last month’s decline, consumers’ confidence appears to be growing.”

Consumers’ assessment of present-day conditions improved in May.  Those stating business conditions are “good” decreased to 21.1 percent from 22.2 percent, while those stating business conditions are “bad” declined to 24.1 percent from 24.8 percent.  Consumers’ assessment of the labor market was more favorable.  Those claiming jobs are “plentiful” rose to 14.1 percent from 13.0 percent, while those claiming jobs are “hard to get” decreased slightly to 32.3 precent from 32.8 percent.

Consumers’ expectations increased slightly in May.  The percentage of consumers expecting business conditions to improve over the next six months edged up to 17.5 percent from 17.2 percent, while those expecting business conditions to worsen decreased marginally to 10.2 percent from 10.5 percent.

Consumers were more positive about the outlook for the labor market.  Those anticipating more jobs in the months ahead increased to 15.4 percent from 14.7 percent, while those anticipating fewer jobs edged up to 18.3 percent from 18.0 percent.  The proportion of consumers expecting their incomes to grow increased to 18.3 percent from 16.8 percent, but those expecting a drop in their incomes also increased, to 14.5 percent from 12.9 percent.

Source: The Conference Board 

May 23, 2014

Sales of newly built, single-family homes rose 6.4 percent to a seasonally adjusted annual rate of 433,000 units in April, according to newly released data from HUD and the U.S. Census Bureau.  The gain builds on an upward revision of sales numbers reported for the previous month.

“Builders are gradually increasing sales but tight credit conditions, particularly for first-time home buyers, are impeding a more robust recovery,” said Kevin Kelly, chairman of the National Association of Home Builders (NAHB) and a home builder and developer from Wilmington, Delaware.

“In a positive development, builders are adding inventory in anticipation of a further release of pent-up demand,” said NAHB Chief Economist David Crowe.  “We are only about half-way back to what could be considered a normal market, but relatively low mortgage rates and affordable home prices are other factors that should help keep starts and sales on a slow upward trajectory in the months ahead.”

On a regional basis, new home sales rose 47.4 percent in the Midwest and 3.1 percent in the South and held steady in the West.  The Northeast posted a 26.7 percent decline.

The inventory of new homes for sale increased to 192,000 units in April.  This is a 5.3 month supply at the current sales pace.

Source: National Association of Home Builders

May 22, 2014

Sears plans to close at least 80 stores this year after widening its loss in the first quarter of fiscal 2014.

Although same-store sales increased 0.2% for the quarter, the company’s net loss climbed to $402 million from $279 million in the prior-year quarter.  Revenues declined 7% to $7.9 billion, from $8.5 billion in the prior-year quarter.

Sears attributed its continued decline in revenue to the closure of Kmart and Sears full-line stores, as well as the divestiture of its Lands’ End business.  But according to a Reuters report, analysts pointed to the effect of promotional transactions on gross margin, with one analyst going so far as suggesting that the company’s new business model – namely Shop Your Way – may be doing more harm than good since the company offered deep discounts on “already promoted, low-margin items.”

“Sears is undergoing a significant transformation, and we fundamentally are changing the way we do business,” said chairman and CEO Edward L. Lampert.  “Our performance in the first quarter highlights the challenges we are facing as well as the progress we are making in this transformation.  We are moving away from a company that was heavily based on selling products solely through a store-based network to a member-centric business model focused on providing benefits to our members anytime and anyplace.  We are seeing progress in our transformation to a member-centric, integrated retailer, as we continue to invest heavily in driving our Shop Your Way program.”

Source: Retailing Today

May 22, 2014

Increases in traffic and average ticket resulted in record first quarter sales growth at Dollar Tree.

Consolidated net sales for the quarter were a record $2 billion, a 7.2% increase compared to $1.87 billion reported for last year’s first quarter.  Consolidated comparable store sales increased 2% on a constant currency basis.  Adjusted for the impact of Canadian currency fluctuations, the comparable-store sales increase was 1.9%.

Earnings per diluted share for the first quarter were $0.67, a 13.6% increase compared to earnings per diluted share of $0.59 reported for last year’s quarter.

Discretionary business grew slightly faster than consumables and leading categories for the quarter included candy, check-out products, stationery and seasonal merchandise for Valentine’s Day and Easter.

“Our stores are currently filled with a balanced mix of consumable products and exciting variety merchandise for Summer Fun.  Inventory is clean and fresh and our associates are focused on providing a great shopping experience for every customer, at every store, every day,” said CEO Bob Sasser.

The company continues to expand.  During the first quarter, Dollar Tree opened 94 stores, closed six stores and expanded or relocated 28 stores.  Retail selling square footage increased 6.8% compared to a year ago, to 44.0 million sq. ft.

Looking ahead, the company estimates sales for the second quarter to be in the range of $1.97 billion to $2.02 billion, based on low-single digit positive comparable-store sales.  Diluted earnings per share are estimated to be in the range of $0.58 to $0.64.

Full year sales are now estimated to be in the range of $8.37 billion to $8.54 billion.  This estimate is likewise based on a range of low-single digit positive comparable-store sales.  Fiscal year 2014 diluted earnings per share are expected to be $2.94 to $3.12.  These estimates assume no impact from potential additional share repurchase activity in 2014.

Dollar Tree operated 5,080 stores in 48 states and five Canadian Provinces as of May 3.

Source: Retailing Today