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Low Expectations Bolster Home Improvement Chains

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The Associated Press

The Tampa Tribune

Published: January 1, 2009

CHICAGO - A year that started poorly got worse for many of the nation's home improvement retailers, as the housing market meltdown pushed the economy toward recession and financial institutions sparked a global economic disaster.

But while shares of apparel, home furnishings and electronics retailers plunged as cash-strapped, out-of-work consumers pulled back on spending, shares of the nation's largest home improvement chains - Home Depot Inc. and Lowe's Cos. Inc. - fell only marginally in 2008.

Home Depot's shares are down 13 percent for 2008, while Lowe's is off more than 4 percent, widely outperforming the 40 percent drop seen in the Dow Jones Total Market Index and the 39 percent in value lost by the Standard & Poor's 500.

"I think a lot of that is because the home improvement retailers took their beating in 2006 and 2007," said Morningstar analyst Brady Lemos. "They were the first ones to reflect the challenging housing market. So I think there was a lot of negativity built in and I think they met those lowered expectations."

Home Depot, Lowe's and private competitors such as Menard Inc. and True Value Co. were among the early victims of the housing bubble burst. As the decline gave way to a full-fledged recession, shoppers scaled back on everything from home decor items to major kitchen overhauls.

That sent 2008 profits skidding 38 percent at Atlanta-based Home Depot and 15 percent at Mooresville, N.C.-based Lowe's through the first three quarters of 2008.

Amid the continued market slump, the retailers' efforts to keep inventory down resulted in better-than-expected gross margins. In September, Home Depot cut prices on as many as 1,200 items from trash bags to toilets in an effort to boost sales and win back customers.

But store closings also mounted and expansion plans were curtailed as the retailers cut costs.
Home Depot closed 15 stores by July. Lowe's cut store openings to 120 in 2008 from a planned 140 and discontinued plans for 37 previously approved stores, mainly because of problems with site configuration and high costs.

"They might have been too aggressive on their store expansion and now they're scaling that back pretty significantly," Morningstar's Lemos said.

Executives at the two publicly traded rivals have said they expect challenges to continue because of the recession and are planning business accordingly.

In 2009, Lowe's will further slash the number of stores it opens, cutting the ribbon on just 75 to 85 new sites - including seven locations in Mexico and Canada. Lowe's also plans to scale down the size of most new stores in medium and large markets by about 19,000 square feet to help the nation's No. 2 home improvement chain cut capital outlay costs by almost $2 million per store.

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