As home slump lingers, hope turns to ’09

NATIONWIDE RT REPORT—No piece of the retail industry has felt the pain of the soft economy as much as the home improvement sector. Yet even while home improvement retailers and manufacturers are working on their contingency plans for the balance of 2008, they can take solace in the fact that sales are expected to decline at a slower rate between now and the end of the year, as the housing slump winds through a second year and culminates in what many are hoping will be a rebound in 2009.

One year ago this month, Lowe’s and The Home Depot reported their first sharp drops in same-store sales to signal where things were headed, with 2007 first quarter sales falling 7.6% at Home Deport and 6.3% at Lowe’s. And while both chains are expected to report at least a 5% drop in same-store sales when they release first quarter results in late May, they should at least be better than last year.

Goldman Sachs analyst Matthew Fassler touched on this trend in a research note that noted stocks for the chains will “trade through normalized valuations when earnings visibility improves,” adding that he expect positive sales to return in the first quarter of 2009.

NPD Group analyst Mark Delaney agreed that the numbers will probably look better this year but said it’s a small consolation. “At least it’s a comparable year and they’re comparing apples to apples, ”said Delaney. “But that’s a real ‘glass half-full’ way of looking at it.”

The bottom line is that even though the bar has been lowered for home improvement retailers, they’re still expecting sales to fall even when matched against weak 2007 numbers. Home Depot, which reported its first ever decline in year-to-year sales in 2007 sales, expects same-store sales to decline in the “mid to high single digits” for the year while Lowe’s is projecting a 5% to 6% decline.

But there’s hope on the horizon after this year. According to the HIRI/Global Insight forecast for home improvement products, sales are expected to fall 1.5% in 2008 following a 2% drop to $306.7 billion in 2007—the first decline since 1991. The report attributed the ongoing slump to “the sharper than expected decline of housing market activity and the general slowdown in consumer spending.”

Sales will rebound, albeit slowly, in 2009 on the strength of a “housing market now expected to show only a gradual recovery initially.” The report predicts a 2.9% increase in sales in 2009 followed by accelerated jumps in sales averaging 6% from 2010 through 2012.

And there are some product categories that are still growing. According to the National Gardening Association, sales of lawn and garden products increased 3% to $35 billion in 2007 driven by more consumers doing their own lawn work rather than hiring someone else to do it.

Delaney says retailers hunkering down for the next eight months will be promoting more affordable categories like lawn and garden and getting more creative in stores with back-to-basics merchandising, an approach that will pay dividends in the long run. “One of the positive offshoots of a bad economy is that it forces retailers to take a closer look at the inside of their stores,” said Delaney.