home improvement

Home Improvement Retailers

Industry Insight

summary-date July 2016

By the numbers

Synopsis

Current trends:

  • Home Depot’s U.S. same-store sales rose 7.4 percent during the first quarter, which was narrowly bested by Lowe’s 7.5 percent gain
  • Home improvement stores are performing solidly amidst a turbulent retail landscape

Key statistics

  • Industry revenues: $164.1 billion (U.S.)
  • Major product categories: Hardware, tools, plumbing and electrical supplies; lumber and building materials; paint and sundries; lawn, garden, and farm supplies
  • Significant companies: Home Depot Inc.; Lowe’s Companies, Inc.; Menard Inc.
  • Market share of top: The top two companies, Home Depot and Lowe’s, dominate with 83 percent of the market
  • Recent sales trends: In the five years to 2016, industry revenue is expected to rise at an annualized rate of 4.4 percent, including 3.8 percent growth in 2016 (IBISWorld)

Investment in home improvement rising: A strengthening housing market, low interest rates and a warm winter are among the reasons cited for the underlying strength in retail home improvement. In May 2016, existing home sales rose 1.8 percent, the highest pace in over nine years, according to the National Association of Retailers. The median sales price reached an all-time high. Along with this rising equity, mortgage rates remain at record lows, fueling home sales and refinancings.

These favorable trends are giving homeowners the confidence to invest in home improvement projects. The Leading Indicator of Remodeling Activity (“LIRA”) projects that home remodeling spending will increase 8.6 percent by the end of 2016 and to 9.7 percent by the first quarter of 2017, according to the Joint Center for Housing Studies at Harvard University. A relatively mild winter contributed to a stronger than expected start to the beginning of the year for major home improvement retailers. Home Depot and Lowe’s both reported impressive performance during the first quarter, boasting 7.4 percent and 7.5 percent increases, respectively, in U.S. comp store sales. While Lowe’s outperformed Home Depot during the quarter, it was the first time the company’s domestic comparable sales had done so since 2010.

Both companies are focusing on their pro- business and ecommerce channels as areas for growth. Pro customers shop more often and spend more than do-it-yourself shoppers. In 2015, Home Depot acquired Interline Brands, a direct marketer of repair products, for $1.6 billion, expanding its reach to property managers of multifamily housing complexes. Just a few months later, Lowe’s relaunched its LowesForPros.com website aimed at professional contractors and remodelers. Both professional and retail customers are benefiting from the continued integration of web shopping and ordering with brick and mortar pickups and returns. Home Depot and Lowe’s reported year-over-year growth in online sales of more than 20 percent during the first quarter of 2016.

Seasonality Influences NOLVs: Typical of many retailers, hardware and home improvement stores exhibit strong sales seasonality. A significant percentage of sales typically occur between April and July, in line with weather-related home improvement and remodeling peaks. These seasonal sales patterns affect net orderly liquidation values (“NOLV”), both through gross recovery values and store level sales capacity. Moderate or significant variations may occur depending on the timing of a going-out-of-business (“GOB”) sale and the monthly sales volume encompassed by the corresponding sale term.

Seasonal categories such as lawn and garden products, including grass seed, chemicals and equipment; outdoor furnishings; ice melt and snow blowers recover differently (sometimes significantly) depending upon the timing of a GOB sale. An early spring or winter can impact category sales positively or negatively, depending upon mix and assortment. As a result, high and low season gross recovery rates for identical product can vary from five to fifteen points on retail. And depending upon in-stock inventory levels, high and low seasonality ranges may have a material effect on overall gross and net recovery rates.

Appraisals must consider this seasonality. Out-of-season inventory management as well as in-season replenishment cadence can also have a material impact on recovery values. Normal course discounting to clear through seasonal product is essential. On-hand excess seasonal product during a non-peak period may require additional discounting to sell through in a GOB sale. Partnering with an appraiser to understand the implications of seasonal recovery values on NOLVs is especially important in segments like hardware and home improvement stores where over 30 percent of annual sales can occur within two to three months. A forward-looking seasonal model can provide asset-based lenders with the insight needed to adjust advance rates in order to navigate through seasonal high periods while mitigating risk during seasonal lows.

Category Demand Drives Range of Recovery Rates: Many retailers are resigned to carrying a selection of low-turning inventory in order to provide customers with a range of core product options as part of the normal course of business. When faced with a bankruptcy filing and subsequent liquidation, this product often has low sell through rates, due either to its extreme specificity or lack of demand because of seasonality.

Even specific categories for hardware retailers can drive significantly higher or lower gross recovery rates depending upon intended use and level of inventory availability. High recovering categories such as hand and power tools, branded household cleaners and fuels such as propane typically require less discounting to sell through regardless of the season. Conversely, categories including hardware and fasteners (e.g., depth in quantities of a broad assortment of nuts and bolts), as well as specific project- and repair-based plumbing and electrical supplies (e.g., PVC piping, bulk wire or electrical cable), typically are in lower demand and therefore require additional discounting to sell through quickly. The delta between high and low recovering categories in the hardware segment can be as much as 40 points on retail. Even within a stronger recovering category such as premium branded paint, there is the potential for a lower recovery on non-traditional base colors or less in-demand finishes.

Thus, managing discounts on high and low recovering inventory in tandem with seasonal demand and on-hand inventory levels is critical to a successful GOB event. Understanding and predicting gross recovery rates by category, brand, region and season comes with experience. Gordon Brothers applies real-world disposition involvement to each appraisal analysis, which in turn assists asset based lenders in offsetting the risks associated with low-turning inventory.