Home Improvement Remains a Retail Bright Spot

Comparables far outperform general retail market

Author: Andria Cheng

May 24, 2017

Is the home-improvement sector, long a bright spot in the upended US retail market, still going strong?

That’s a natural question to ask in wake of disappointing sales results reported by No. 2 US improvement retailer Lowe’s Cos. Wednesday. Another indicator that could impact home-improvement spending: The National Association of Realtors reported a 2.3% decline in April existing-home sales from March.

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Despite those headlines, the sector, led by industry giant Home Depot, is likely to continue to outperform. While Lowe’s reported a disappointing 1.9% Q1 comparable sales increase that trailed the 5.5% gain Home Depot reported, that’s still above the meager 0.1% increase Retail Metrics data showed the entire retail sector is expected to eke out. Another sharp contrast: Many apparel, luxury and department store segments are seeing sales continue to decline. Tiffany & Co., for instance, on Wednesday reported an unexpected comparable sales drop.

“The home improvement industry should continue to see solid gains in job and income growth” to drive increases in both disposable income and consumer spending, said Lowe’s CEO Robert Niblock on a call Wednesday. “Housing is expected to remain a bright spot.”

Lowe’s recent consumer sentiment survey also painted “similar favorable trends,” Niblock said.

“Rising home prices are continuing to encourage homeowners to engage in more discretionary projects in addition to ongoing maintenance and repair spending, and we believe that this trend will continue,” he said, adding well over half of homeowners it surveyed believe their home values will continue to rise and nearly half of them said they intend to engage in a home improvement project in the next six months, with their home improvement spending expected to continue to outpace overall spending.

Tight housing supply has contributed to rising prices.

Indeed, the tight housing supply is a key reason for the decline in existing home sales, according to the National Association of Realtors. In fact, the median number of days a home remains on the market has declined to under one month. That tight supply, meanwhile, has translated to higher prices. The median existing home price rose 6% in April from a year earlier, 62nd straight monthly increase, the association said.

“Clearly there is demand that’s being created by this housing market that is very strong,” said Home Depot CFO Carol Tomé in the company’s earnings call last week. Among 76 million owned households in the US, she noted, there are only 3.2 million that have “negative equity in their home,” compared to 11 million in 2011.

The home improvement sector has outperformed the overall retail sector since mid-2012, with Home Depot outpacing Lowe’s in 28 of the past 30 quarters, according to Retail Metrics.

Lowe’s has trailed Home Depot in part because it’s not as strong traditionally in the business targeting professional contractors, where demand continues to outpace that of regular DIY customers at both companies. Lowe’s also missed mark in Q1 after a miscalculation on the marketing front to focus on indoor products, hurting demand for lawn, garden and other outdoor goods as weather turned warmer, analysts said.

To sustain their momentum going forward, both companies are targeting professional contractors more aggressively. Lowe’s this month agreed to buy Maintenance Supply Headquarters, a distributor of maintenance and repair supplies to the property management industry, following a similar purchase in November. “This is an important step and our strategy to deepen and broaden our relationship with Pro customers and better serves their needs,” Niblock said. 

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The Home Depot

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Home Depot, for its part, in 2015 bought maintenance and repair products distributor Interline Brands for $1.63 billion. CEO Craig Menear said last week that it’s rolled out Interline’s catalogue of products to over 1,500 US Home Depot stores. “We remain very excited about the opportunity that Interline provides,” he said, adding sales growth there outpaced the company average. Professional contractors is “another engine of growth for our business.”

Among other initiatives to increase their pro business, Home Depot has a referral program to connect contractors with customers that seek professional help. Lowe’s, meanwhile, has a separate Lowesforpros.com website.

Both companies also are expanding online and trying to integrate that with stores through initiatives such as pick up in store. Home Depot has upgraded its site to speed up the checkout process and is featuring personalized pages on its mobile app to target customers based on where they are and their shopping patterns. Home Depot’s Q1 online sales rose 23% to represent 6.6% of total sales. Lowe’s, meanwhile, said Q1 comparable sales at Lowes.com rose 27% and online sales made up 3.5% of the company total last year.

Amid concerns about increased online competition led by Amazon, Home Depot CEO also gave a comforting sign that the sector may still be relatively more Amazon-proof compared to other sectors: 45% of Home Depot’s online orders were for in-store pickup.

“Many times the customer still wants to come in and talk to one of our associates and maybe go through some product and questions that they may have about the process,” Menear said. “It’s really something that we have been watching carefully, but we’ve been incredibly fortunate that we’ve been able to grow both channels really across categories.”