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Ablip on the scoreboard

This year’s sales for the Top 500 home channel retailers...
Sales breakdown of the Top 500 companies by store type in 2007 ...
Sales breakdown of all U.S. home channel companies by store...

The numbers are in and—no surprise—they reflect a challenging market.

For the first time since Home Channel News began compiling the Top 500 Scoreboard more than 20 years ago, home improvement retailers showed an overall decline in sales in 2007. On the positive side: hardware stores and farm and fleet retailers showed surprisingly strong sales results, boosted respectively by smaller projects around the home and big-time agriculture spending.

The worst housing downturn in recent memory has led to sub-par performances for several major retailers, dragging down overall sales of the Top 500 retailers to $251 billion—a 2.1 percent falloff from the list’s $256 billion posted the previous year.

In 2007, pro dealers were the hardest hit retailers on HCN’s Top 500 list, which also includes large home centers, hardware stores, farm suppliers and paint and floor covering retailers. Pro dealers, who cater to both new home builders and large remodelers, showed a 14.6 percent decline for the year, with Top 20 players like Builder’s FirstSource (No. 17), BMHC (No. 12) and 84 Lumber (No. 10) down 28.9 percent, 28.7 percent and 20.9 percent, respectively. Most notably, Ply Mart (No. 34) went out of business altogether (See story, page 3).

On the other hand, hardware stores and farm and fleet retailers showed surprisingly strong sales results, boosted respectively by agriculture spending and smaller projects around the home. Overall, decliners led gainers. Just 162 companies on the list showed sales gains, while 281 showed sales declines. Compare those numbers to a good year—in 2004, for example, 404 companies showed gains, with just seven showing losses—and it brings the severity of the housing crisis into sharp focus.

“Almost certainly, the decline in these sales is a sympathetic reflection of the plunge in new home building, the steep decline in existing home sales, a slowdown in renovations and a drop in property values,” said James Glassman, managing director and senior policy strategist with JPMorgan Chase & Co. in New York.

“And 2008 sales comparisons could be worse than 2007 because activity late last year and early this year has been so abysmal. Home building remains weak, home prices are still falling and credit remains expensive and in short supply for housing.”

Two years ago, the weakness was concentrated in the industrial Midwest—places like Detroit and northern Ohio, with strong ties on the auto industry. But in 2007, the housing crisis spread to metro markets that had seen rapid price appreciation over the previous five years. The worst of these were California, Las Vegas, Phoenix and all of Florida, while Texas, the Pacific Northwest and parts of the Southwest have been somewhat more insulated.

“We’ve seen the biggest decline in the housing market since the Great Depression,” said Paul Hylbert, CEO of ProBuild Holdings (ranked 7th), which was down 16 percent in sales after an almost 30 percent increase the previous year. He said the “housing depression” has been the most pronounced in Florida, Arizona, Atlanta, Denver and Chicago because of the high incidence of exotic mortgages and subprime activity in the mid-2000s. Hylbert also pointed to deflation in wood prices from 2006 to 2007 as a driving factor in the sharp decline for LBM dealers.

Large home centers were basically flat (down 0.2 percent) for the year, but that doesn’t tell the whole story. No. 1-ranked Home Depot suffered its first-ever sales decline (2.1 percent), while the critical comp-store sales number was negative 6.7 percent. And to underscore what CEO Frank Blake called “a difficult year financially,” the retailer announced in May that it would close 15 underperforming stores—leading to the layoff of about 1,300 employees—and remove 50 future openings from the new store pipeline.

No. 2-ranked Lowe’s fared little better, with earnings down 9.5 percent and comp-store sales down 5.1 percent, while No. 5-ranked Sears suffered a 6.5 percent sales decline, with net income off almost 45 percent. “We need to come up with bigger and better ideas,” Sears chairman Edward Lampert said during the company’s annual meeting May 5, adding that he sees “no evidence” of a U.S. economic recovery in the near term.

There were, however, some bright spots on last year’s cloudy landscape. The farm & fleet segment—aided by the booming agricultural sector—showed a 12.9 percent increase, as markets like Iowa, Idaho, and parts of Ohio, Illinois and Indiana prospered because of soaring corn and wheat prices. This, in turn, led to increased sales of farm equipment and farm animal-related products and a generally better economic climate in those areas.

Top 500 company spotlights

#1 Home Depot, Atlanta

2007 HIGHLIGHTS: Opened 87 stores in the United States; completed sale of HD Supply; closed all 11 Home Depot Landscape Supply stores and two Home Depot Floor stores.

OUTLOOK: After reporting a 66 percent drop in fiscal first-quarter profit on May 20, the largest home improvement retailer said its full-year per-share profit could fall as much as 24 percent. CEO Frank Blake emphasized a long-term strategy to deal with the downturn in the housing market, while acknowledging Home Depot’s stock price will cause some “short-term pain.” Home Depot is also investing $180 million this year to improve customer service.

#140 Rodda Paint, Portland, Ore.

2007 HIGHLIGHTS: Opened new locations in Kennewick, Wash., and Grants Pass, Ore.

OUTLOOK: “This year is going to affect everybody to some degree, but we are a diverse company, and commercial and industrial are still going well for us,” said marketing manager Lis Weller. “We’re going to try to match the 5 percent growth of last year, but I think we’ll end up with about half of that.”

#265 Zeeland Lumber & Supply, Zeeland, Mich.

2007 HIGHLIGHTS: Started Zeeland Contractor Services, offering builders installed framing and other services. “In a down economy, that’s been a growth opportunity for us,” said president Herk Vanden Bosch.

OUTLOOK: With housing starts in western Michigan down 72 percent to 74 percent since 2005, Vanden Bosch believes things will start to pick up in the second half of 2009 as the region is increasingly recognized as a retirement area and for its growing health sciences business.

#360 Caledonia Farmers Elevator, Caledonia, Mich.

2007 HIGHLIGHTS: Caledonia’s farm supply business and feed and farm retail stores benefited from the booming agricultural sector, offsetting losses from its lumberyard.

OUTLOOK: CEO Dwayne Ruthig believes 2008 will prove to be another good year, as crop prices and milk prices are holding strong, and the weather has been “better- than-average” for planting.

#466 Vision Ace Hardware, Naples, Fla.

2007 HIGHLIGHTS: Opened new stores in Fort Meyers and Clearwater, Fla.

OUTLOOK: Owner Jim Ackroyd will continue to concentrate on higher margin, small project items and controlling costs. With 11 stores ranging from 12,000 to 30,000 square feet, he is now focusing on the 10,000-square-foot format with outdoor garden center. “We think there are opportunities in this down market to expand,” Ackroyd said. “The cost of real estate has come down, which is helping.”

The jump in sales for these farm suppliers speaks volumes: No. 167 Valley Co-Ops in Jerome, Idaho, was up 66.7 percent; No. 219 C-A-L Stores in Idaho Falls, Idaho, was up 64.7 percent; No. 273 Agland Co-op in Canfield, Ohio, was up 31.9 percent; and No. 126 Farmers Cooperative Elevator in Arcadia, Iowa, was up 23.9 percent.

“Farmers have money, which is good for us in those markets, too,” said ProBuild’s Hylbert. “Of course, it’s not a large share of the business, but it does help offset what’s happening in the metro markets, which have been hardest hit.”

No. 11-ranked Tractor Supply—up 14.1 percent—opened 89 new stores in 2007, venturing into new markets like Louisiana and New Mexico. According to president and chairman Jim Wright, some of his company’s best-performing products involved the health and well-being of animals and pets, including pharmaceuticals and housing for agricultural animals, vaccinations, animal feed, and all price levels and brands of pet food.

“When you look at the categories that have performed well for Tractor Supply, it’s categories that aren’t really available in the hardware and home improvement channels,” said Wright, whose company now has 791 stores in 43 states. “The real markets we serve are not as impacted by housing, and our customers tend to be conservative in terms of taking on debt.”

Hardware store sales were also up (11.7 percent), which Do it Best president and CEO Bob Taylor attributes to homeowners focusing on smaller projects in the current economy. “When you look at the general hardware piece of it, in many cases, the members cater to more day-to-day care and maintenance,” said Taylor. “If people are staying closer to home, they’re investing in the home, so it’s more stable. We’re not talking about the major remodel—it’s the everyday activity.”

Methodology

The research for Home Channel News’ Top 500 Retail Scoreboard began with HCN’ s sister company, Chain Store Guide, a Tampa, Fla.-based research firm that collects data on big and small retailers across the United States.

Under the leadership of senior editor Arthur Rosenberg, a team of researchers directly contacted more than 750 companies spanning the entire home channel. Every effort was made to gather information directly from top-level executives.

Information collected by Chain Store Guide was edited, proofed and fact-checked by a team led by Rosenberg and HCN managing editor Michael Moran Alterio. Some of the Top 500 companies did not provide complete data to Home Channel News. For those companies, HCN estimated sales and other data, working primarily from public filings where available; from comparisons with similar, near by companies; and from each company’s past performance.

For companies with equal sales, rank in the Top 500 Retailer Scoreboard is determined by comparing sales growth and number of stores. If two companies have identical sales, the one with higher growth is ranked first; if growth is the same, the company with fewer locations is ranked higher.

Prior-year rankings for each company appear in the alphabetical index beginning on page 66.

For the product category data on pages 46 and 48, information based on public documents and on an anonymous survey of about 150 companies is used to extrapolate product category sales for the Top 500 companies as a whole. Information on the entire home channel, reported on pages 38 and 60, is based on Commerce Department retail sales data.

A deep historical data set with greater breadth than can be offered in print is available in spreadsheet format on HCN’s Top 500 Retailer Scoreboard on CD. For information on ordering the basic or premium Top 500 data CD, please contact Michael Alterio at (212) 756-5235 or visit www.homechannelnews.com/specialreports.

In fact, remodeling activity showed a decline in 2007 (4 percent), according to NAHB chief economist David Seiders, who estimated a 7 percent drop-off for 2008. Not quite as hard-hit as those catering to new home builders, retailers relying mainly on remodeling jobs experienced declines in the high single-digit range, according to Kermit Baker, director of the Remodeling Futures Program for Harvard University’s Joint Center for Housing Studies.

“The decline in the sales of existing homes has really taken the wind out of the remodeling market,” Baker said. “With housing prices declining, homeowners have less equity to tap into for renovations, and there’s enough uncertainty to give a lot of people pause as to whether to invest—even to sell—because they’re afraid they won’t get that money back.”

Baker believes the slide will continue this year as the commercial construction market—considered healthy in 2007—is also slipping. “And with non-residential construction down, flooring stores (up 2.1 percent) and paint stores (down 0.6 percent) could fare even worse this year because they won’t have that market to fall back on,” he said.

Some companies have taken aggressive measures in response to these trying times. 84 Lumber announced the closing of nine stores in March and another 30 in April—bringing the total number of closures to 118 since April 2006. In other news, BMHC announced last month the intention of closing an undisclosed number of under performing units and possibly cutting about 2,000 jobs.

Glassman, from JPMorgan Chase & Co.’s, believes we are beginning to see some positive signs, including the fact that subprime adjustable rate mortgages are being reset to lower levels, and that—in accordance with the government’s stimulus package—rebate checks began to go out April 28 and are starting to show up in retail sales.

“Most of the excess valuation in housing markets has been flushed out, with house price now back into alignment with income (affordability) that we had in 2003,” he said. “And the broad economy is looking more like it stalled last winter than falling into recession.”

Still, most experts agree, the housing market will probably not significantly improve until the early to middle part of next year. “I think the bottom is kind of insight, and then we’ll possibly bump along for a couple of quarters as the financial markets begin to reset,” Hylbert said. “Maybe by mid-2009 we’ll start to see some things getting stronger. I hope it’s earlier, but there’s so much inventory, it will take awhile to absorb it.”

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