Home Improvement Stores
COVID-19 INDUSTRY BRIEF
EFFECTS OF THE CORONAVIRUS ON THE Retail Home Improvement INDUSTRY Updated August 26, 2020
- Pandemic Impacts: In most regions, home improvement stores were deemed essential businesses allowing them to remain open. Lumber product volumes were a bright spot, with companies capitalizing on project-oriented consumers at home due to the pandemic. Some distributors have continued to ship steadily to job sites where builders are trying to finish projects; however, plans were sometimes interrupted by changing regulations, as city, state, and federal officials reacted to the virus.
- Housing Market Rebound: Monthly U.S. homebuilding rates increased for the third straight month in July 2020 with 1.495 million new starts, representing an increase of 17.5 percent over June. July starts increased 22.6 percent over June after falling 26.4 percent to a five-year low in April. Although starts for July remained approximately 7.5 percent below the January peak of 1.6 million, the positive trend bodes well for the industry, at least in the near term. Another positive trend was in the number of building permits for residential construction issued, which increased 3.5 percent and 18.8 percent month-over-month for June and July, respectively. Similarly, after three months of declines (February through April), new single-family home sales also increased in June to a seasonally adjusted annual rate of 776,000, representing a 13.8 percent increase over the revised May rate of 682,000, and a 6.9 percent growth versus the June 2019 estimate of 726,000. This rebound in housing construction and sales bodes well for home improvement retail sales in the near term, as homeowners look to make improvements and purchase items for new homes.
- Retail Traffic Trends: Home Depot and Lowe’s both reported strong second-quarter earnings, following very strong first-quarter results. Both companies reported strong sales growth for the quarter ended July 2020, with Home Depot reporting 23.4 percent top-line sales growth and Lowe’s reporting 34.2 percent sales growth. Although incurring additional costs related to the COVID-19 pandemic, both companies saw organic sales growth despite cutting back on promotional activity.
- Housing Market Demographic Trends: Companies are benefitting from demographic trends within the millennial generation, now entering the housing market and purchasing older, more affordable homes requiring renovation. Based on information from the National Association of Realtors, millennials have accounted for 38% of all home buyers in 2020. This trend, while spurred by the pandemic, is expected to continue and is expected to be a multi-year pattern.
- Valuation Outlook: Other than temporary impacts and commodity pricing issues due to the typical turnover profile, Gordon Brothers would not expect to see large declines in valuations. Special orders may be impacted, especially if construction or housing projects are delayed going forward due to COVID-19-related issues.
Date February 2020
- Home improvement stores are performing solidly amidst a turbulent retail landscape; however, ongoing trade negotiations and the growing impact of coronavirus may negatively impact sales for 2020.
- Seasonal sales patterns affect net orderly liquidation values (NOLV) for home improvement retailers.
- The housing market maintained positive growth in 2019, with both new construction starts and completions up over 2018.
Approximate Net Recovery on Cost
Major Retailer’s Sales Remain Strong: With a combined 85 percent share of the U.S. market, Home Depot and Lowe’s continue to dominate the retail home improvement landscape. Sales for 2019 were positive for both chains, despite some challenges including significant lumber price deflation for the bulk of the year.
For the quarter ended November 3, 2019, Home Depot recorded revenue growth of 3.5 percent, with comparable store sales increasing 3.6 percent on top of positive revenue and comp sales for the corresponding period in 2018. Although the company’s gross margin for the quarter was down slightly (negative 0.3 percent), overall revenue benefited from sales of big ticket items (over $1,000), which comprised 20 percent of sales and increased 4.8 percent during the quarter. Lowe’s third-quarter revenue was down slightly at negative 0.2 percent; however, comparable store sales increased 2.2 percent and gross margins increased 1.5 percent for the quarter. In November 2019, the company announced that it would close 34 under-performing Canadian stores as part of its ongoing strategic reassessment of its Canadian operations.
January 2020 sales for home improvement retailers increased 2.1 percent over December driven by promotional activity, milder weather, and December revisions. January momentum bodes well for home improvement retailers as they head into spring, which is one of the industry’s busiest seasons.
Ongoing tariffs and coronavirus cause concerns: Optimism has surrounded the Phase One Economic and Trade Agreement with China that was signed on January 15, 2020. Although the deal suspends some List 4B tariffs and reduces some from List 4A, it does not alleviate tariffs on many items tied to new home construction. A 25 percent tariff on List 3 items remains in place for a range of construction materials, in particular a wide range of cement types including blocks, wall and floor tiles, and a long list of cement additives. As a result, Creditntell anticipates that tariffs will continue to affect gross margins and create uncertainty around supply chains, potentially causing a falloff in business investment for the home improvement and building materials space.
Strong economic trends including 2.1 percent GDP growth for the fourth quarter of 2019 and continued low unemployment through February 2020 (3.5 percent) boosted new, single-family home sales for the month of January to a seasonally adjusted annual rate of 764,000, which was up 7.9 percent over December and 18.6 percent above January 2019.
Nevertheless, as of mid-March 2020, ongoing trade negotiations and the recent global escalation of the Coronavirus outbreak have set markets into a holding pattern as consumers attempt to assess how potential travel bans, school closures, and quarantine mandates will affect spending patterns. To the extent that consumer confidence decreases and Americans postpone major purchases and home repairs, the segment could experience a considerable setback. Regarding the home improvement sector, the Joint Center for Housing Studies at Harvard recently projected a slowdown in remodeling activity, with growth projected at just 1.5 percent for 2020 as compared to 4.8 percent in 2019.
Looking further ahead, IBISWorld projects unemployment will remain low and per-capita disposable income will increase, estimating that industry revenue will increase at an annualized rate of 1.1 percent through 2024. It should be noted that this forecast pre-dated the global expansion of coronavirus and may be negatively impacted in the near term.
Seasonality influences NOLV: Typical of many retailers, hardware and home improvement stores exhibit strong sales seasonally, with a significant percentage of sales typically occurring between April and July in line with weather-related home improvement and remodeling peaks. Weather-related events can also drive geographic sales volume. Whether typical or atypical, seasonal sales patterns affect NOLVs, 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 so) depending on the timing of a GOB sale. An early onset of spring or winter can impact category sales positively or negatively, depending on mix and assortment. As a result, high and low season gross recovery rates for identical products can vary from 5 to 15 percentage points on retail. And depending on 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 inventory often has low sell-through rates, either because of 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 on 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 percentage 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.
Managing discounts on high- and low-recovering inventory in tandem with seasonal demand and on-hand inventory levels is therefore 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.
Note: This publication is provided for informational marketing purposes only. The material contained herein should not be regarded as advice, nor relied upon to make financial, operational or other decisions; nor should it be used as a substitute for an asset appraisal. Actual recovery values may vary from transaction to transaction and the recovery values referenced herein are for representative transactions without regard to specific key factors. This material may be redistributed only in its entirety, including notice of copyright. All rights reserved. ©2020 Gordon Brothers, LLC.
Reference sources: U.S. census bureau, home depot, lowes, creditntell, Sandler, Travis & Rosenberg, P.A. (STR) trade