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Home improvement industry needs a fix-up
If I had a hammer I'd hammer in the morning I'd hammer in the evening All over this land -Lee Hays and Pete Seeger The two folk legends most definitely had a noble cause in mind when they penned the lyrics to If I Had a Hammer in 1949. But today it might as well serve as a call to arms for the home improvement industry. It's not the easiest of times to convince homeowners they should be galloping down to the local big box to load up on fix-it gear. The U.S. housing market is in the midst of a gut-wrenching decline. The latest available data shows existing home sales have dropped to the lowest level in a decade. The S&P/Case-Shiller home price index suffered its deepest setback on record in May. And an increasing number of Americans are being thrown out of house and home. According to RealtyTrac, foreclosures jumped by 55 percent in July and home repossessions by banks were 184 percent higher than a year ago. Ethan Harris, chief U.S. economist with Lehman Brothers in New York, reckons it will be another year before home prices bottom out. "There’s quite a ways to go in the housing recession," he said. "This is about twice as bad as what most economists expected." The troubles aren't stopping at the border. In a research report last week, Merrill Lynch Canada's team warned housing in Canada has entered a "sustained downturn." "I don’t think the situation is as dire as what we've seen in the U.S.," David Wolf, head of Canadian economics and chief strategist at Merrill Lynch Canada, said. "We're not likely to see the same kind of price collapse as what we saw down south. But certainly the pressure is there." Indeed, the pressure is mounting. The Canada Mortgage and Housing Corporation reported housing starts dropped sharply in July to an annual rate of 186,500 units. The housing agency subsequently said it expects starts to drop in 2008 and 2009. The pipeline of construction intentions doesn't appear terribly bright either – Statistics Canada said the value of building permits fell by 5.3 percent in June. That shouldn’t come as much of a surprise when you consider what new homes are fetching these days. According to StatsCan, prices for brand new abodes increased by 3.5 percent in June; that was the slowest rate of growth since March 2002. Previously-owned homes are faring even worse; The Canadian Real Estate Association says resales were 10.9 percent lower in July, with the average home price dipping by 3.6 percent. After that data point surfaced, Mr. Wolf was taken aback and told BNN maybe he hadn’t been pessimistic enough in his report. Retailers that depend on do-it-yourselfers sprucing up their pads are having an understandably difficult time. Canadian Tire recently blamed unfavourable weather and economic challenges for a disappointing performance in its second-quarter results. While chief executive officer Tom Gauld said he expects his company’s bottom line to improve in the last six months of the year, that won't be enough to offset a rough start to the year. Canadian Tire is now expecting to earn an adjusted per share profit of between $4.75 and $5.05 this year, versus its earlier forecast of between $5.15 and $5.40 per share. That drew the ire of investors who punished the shares to the tune of seven per cent on the day of the warning. Canada's other bastion of home improvement is encountering problems of its own. Earlier this week, RONA blamed its 4.4-percent drop in second-quarter same-store sales on lower consumer confidence and the deterioration in the housing market. "Considering the recent statistics with regard to housing starts," Claude Guevin, RONA's chief financial officer told BNN this week, "we are not proud but we are satisfied about the current results." In February, RONA unveiled a four-year plan that included growing earnings per share by low single digits in 2008 and 2009, with double-digit growth hoped for in 2010 and 2011. But the environment has changed since those plans were unveiled in February. Blaming a deeper-than-anticipated economic slowdown in Canada and what it called a "swifter and sharper" fall-off in housing activity, RONA says hitting its targets in 2008 and 2009 will be a bigger challenge than it thought. If these are anxious times at RONA, one can only imagine how tight the collars are getting at Home Depot's HQ in Atlanta. Frank Blake inherited the top job at the world's biggest home improvement retailer in January 2007 when chairman and chief executive officer Robert Nardelli flew off in his $210-million US golden parachute, after shareholders engaged in a relentless campaign of criticism over his compensation package. The new boss was well aware of the legacy issues Mr. Nardelli left behind. But Laura Wallace, managing director of Coleford Investment Management, figures the extent of the housing market mess likely caught Mr. Blake off guard. "He knew about some of the issues facing the company, particularly the morale situation. But it was impossible to know how severe the housing correction would be," Ms. Wallace said. A little over a year since he became CEO, Mr. Blake is attempting to bring supply in line with demand. With a bloated network of 2,258 stores, 1,970 of which are in the United States (beyond its Canadian presence, Home Depot also has 69 stores in Mexico and a 12-store toehold in China), the boss is cutting the fat. In May, Mr. Blake announced Home Depot will close 15 stores in the U.S. It was the first time the company has ever decided to shutter stores for performance reasons. Combined with a plan to yank 50 stores out of its pipeline, Home Depot handed itself a $586-million US charge. When the company reported first-quarter results a couple of weeks later, it unveiled a 60-percent drop in profit. With same-store sales dropping by 6.5 percent, Mr. Blake admitted, much like his counterparts at RONA, that Home Depot underestimated the magnitude of the industry's challenges. "The housing and home improvement markets remained difficult in the first quarter; in fact, conditions worsened in many areas of the country," Mr. Blake said on May 20. Indeed, there’s little sign of an improvement on the company's home turf. Online real estate information source Zillow.com has reported that 29.1 percent of Americans who purchased a home since 2003 are facing negative equity – meaning they owe more on their mortgages than their property is worth. Not exactly the kind of situation that inspires a trip to the local big box to pick up a new state of the art toilet, is it? Nor is it the kind of environment that would tempt Ms. Wallace to take a position in the home improvement stocks. She figures it will be some time before the U.S. housing market bottoms out. Combine that with a softening in Canada, and she said it's simply too early to snap up shares in companies that cater to Bob Vila-wannabes. That's sage advice, considering the misery existing shareholders have endured. Home Depot’s stock is marginally under water so far this year. But its .85-percent decline pales in comparison to the 23-percent shellacking RONA's stock has suffered since the start of the year. Canadian Tire has fared even worse; its shares were off by more than 31 percent in 2008 as of the close of trading Thursday. No doubt this is a trying period. But Rick Wolfe, president of PostStone Corporation, figures the retailers that commit themselves to enhancing the customer's experience will outperform the competition. "It’s going to be about value. They need great people on the shop floor, they need to remember the advice people will want is how to get the best bang for the buck. Home improvement will be here forever, the industry isn't under threat. This is a cyclical industry," Mr. Wolfe said. As Home Depot prepares to unveil its latest round of quarterly results, Frank Blake should remember this: it could always be worse. He could be in Bob Nardelli's shoes at Chrysler. Home Depot is scheduled to report its second-quarter results on Tuesday, Aug. 19. Analysts polled by Thomson ONE are forecasting profit of $0.61 per share. http://www.bnn.ca/news/2826.html |
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