Home Centers & Hardware Stores - Renaissance High School · Home Centers & Hardware Stores Companies in this industry sell building supplies, lumber, hardware, tools, and other home

11 .4 .2019NAICS CODES: 44411, 44413

SIC CODES: 5211, 5251

INDUSTRY PROFILE

Home Centers & Hardware Stores

Companies in this industry sell building supplies, lumber, hardware, tools, and other home repair and improvementproducts. Major companies include Home Depot, Lowe's, Menard, and True Value (all based in the US), as well asKingfisher (UK), Leroy Merlin (France), OBI (Germany), and Lowe's-owned RONA (Canada).

The global DIY/home improvement retail market, which includes home centers and hardware stores, is projectedto exceed $680 billion in 2025, up from about $580 billion in annual revenue in 2016, according to Global MarketInsights (GMI). Developed regions, including North America and Europe, accounted for about 85% of the worldmarket in 2017. Japan and Australia are other major DIY/home improvement markets. US giants Home Depotand Lowe's account for 25% of global market share.

The US home center and hardware store industry includes about 22,000 establishments (single-locationcompanies and units of multi-location companies) with combined annual revenue of about $295 billion.

Home centers and hardware stores sell many of the same products, but home centers typically offer morebuilding supplies (such as lumber and flooring) and appliances than hardware stores.

Home remodeling and repair and new homebuilding drive demand. The profitability of individual companiesdepends on low-cost purchasing, effective merchandising, and competitive pricing. Large companies can offerwide selections, supply high-volume goods to builders, and have advantages in purchasing, finance, distribution,and marketing. Small companies can compete by offering specialty products, providing superior service, orserving a local market. The home center segment of the industry is highly concentrated: the top two companiesdominate. The hardware store segment of the industry is fragmented: the top 50 US companies account forabout 35% of segment revenue.

Competition includes building supply wholesalers and distributors, lumberyards, mass merchandisers, warehouseclubs, and internet retailers. US home improvement sales are moving increasingly online, positioning Amazon totake market share from legacy players and spurring home centers Home Depot and Lowes to build out theiromnichannel retail models. In 2018, online sales penetration of the US home improvement market reached 17%,with growth of online US home improvement sales far outpacing total channel growth, according to NPD Group.Home Depot's online sales grew by more than 26% in 2018 to account for 7.9% of net sales, while Lowes onlinesales account for about 5% of its total revenue. As in most other retail sectors it's disrupted, Amazon holds thelion's share of online home improvement sales with 82% market share, according to Jumpshot's eCommerceData Report.

Many of the products sold in home centers and hardware stores are imported, with China being a major source.The escalating trade war between the US and China resulted in the imposition in May 2019 of a 25% tariff onimported building material. Additional tariffs imposed in September on some $300 billion in Chinese products,when combined with previous tariffs, tax nearly all Chinese goods, including cabinets, flooring, plumbing, majorappliances, and tile. Higher materials costs due to tariffs are dampening demand for new home construction andremodeling projects and may result in lower sales and higher prices at home centers and hardware stores.

Major products for US home centers include lumber and building supplies (about 35% of sales); hardware, tools,and plumbing and electrical supplies (25%); lawn and garden products (10%), and paint and sundries (10%).Hardware stores tend to make more of their sales (about 60%) from hardware, tools, plumbing, and electricalsupplies. Building supplies include doors, windows, masonry supplies, cabinets, and countertops. Lawn and

Industry Overview

Competitive Landscape

Products, Operations & Technology

garden supplies include lawn care machinery; outdoor nursery stock (trees and shrubs); and fertilizers. Homecenters often carry a full line of appliances. Companies may also offer installation, delivery, design, or toolrental services. Services represent about 5% of industry leader Home Depot's total sales.

The industry includes national and regional chains and independent retailers. Membership in a cooperative,such as True Value or Ace, allows independent retailers to leverage a national name and benefit from volumediscounts. Cooperative members may receive payouts or dividends based on how well the co-op performs.

Do-it-yourself (DIY) projects generally refer to customers buying products and performing work themselves.Do-it-for-me (DIFM) refers to projects where home improvement retailers supply and install products. Companiestypically rely on third-party contractors for installations.

Large stores require significant amounts of real estate and are typically located in major retail centers tocapitalize on heavy traffic. Locations for independent retailers include secondary strip malls and small towncenters. A typical hardware store is about 9,500 square feet, generates $1.5 million annually, and averages $193in sales per square foot, according to Hardware Retailing. Home centers are about 11,000 square feet, generate$3.6 million annually, and average $299 per square foot. Home centers operated by big-box retailers, includingHome Depot and Lowe's, on average exceed 100,000 square feet of enclosed space, with as much as 30,000square feet of outdoor garden center selling space.

Inventory varies according to store type. Home centers stock more lumber and building supplies because manycustomers are building contractors. Large home centers carry between 30,000 and 40,000 stock-keeping units(SKUs) and typically have wide selections within product categories. While independent hardware retailers offer amore limited selection in stores, cooperatives offer members access to a broad range of inventory. Companiesusing a "good-better-best" merchandising strategy may carry products at different price/quality levels,including national brand names, exclusive brands, and private-label products. Periodically, companies mayhave line reviews for a category to decide which products or brands to add or drop.

Companies buy inventory from manufacturers, cooperatives, distributors, and importers. The supply side ofthe industry is fragmented. Large chains and cooperatives typically have extensive distribution networks tofacilitate shipping from suppliers to stores. Special distribution centers may stock large items, items requiringspecial handling, imports, special orders, or internet sales. Effective supply chain management has allowed largecompanies to realize significant cost savings and keep prices low. Imports are an important source of supply inthe power tool, hardware, and lumber categories. Imported power tools and hardware come primarily from Chinaand Mexico and softwood lumber imports come primarily from Canada.

Technology

Integrated information systems have been extremely important to large companies by linking operations atpoint-of-sale (POS); warehouses; and distribution centers. Bar codes allow companies to track the flow ofindividual products and identify slow- and fast-turning items. Electronic ordering and automaticreplenishment can be important for high-volume stores. Database management systems track importantcustomer groups, such as frequent buyers or new home owners, and help companies create targeted marketingprograms.

Technology related to online sales, including transactions initiated from mobile devices, is a growing area ofinvestment for home improvement stores. Retailers are upgrading e-commerce sites and building newwarehouses for online orders designed to help facilitate same-day shipping of items. Large companies are alsoinvesting in their mobile applications to provide customers with a more seamless experience. Lowe's haslaunched an in-store navigation augmented reality app that helps customers find products inside its large storesusing their smartphones. Digital tools are being put to work in other areas of the business as well, including therecruitment and training of employees. Home Depot uses mobile apps to aid in the recruitment of large numbersof seasonal and temporary workers. The apps allow job seekers to self-schedule in-person interviews from theirsmartphones and have resulted in a surge of applications.

Protecting customer data related to both online and in-store transactions is a major concern for companies,especially after a number of high-profile data breaches at major retailers, including Home Depot, resulted in thetheft of payment card information and customer email addresses. A data breach in fall 2014 impacted HomeDepot customers that used the company's self-checkout systems, costing the company at least $179 million. Asa result, Home Depot undertook a major payment security project to provide enhanced encryption of paymentcard data at the POS in all its stores in the US and Canada. The company, along with other major US retailchains, has migrated to EMV chip card technology, which adds extra layers of payment card protection forcustomers who use EMV-enabled chip cards.

Harnessing big data is on the map for some retailers. Home Depot acquired BlackLotus, a data analytics andpricing firm, to help make better-informed merchandising decisions. At the store level, companies also useanalytics to automate and optimize markdown and clearance processes.

Typical customers include home owners, building contractors, and repairmen. While home centers tend to

Sales & Marketing

attract commercial customers, hardware stores appeal to consumers looking for products needed for DIYprojects or repairs.

Marketing and promotional vehicles include national or local TV, radio, print, and newspaper advertising; directmail; sponsorships; and instore displays and demos. Vendors may provide cooperative advertisingallowances. Partnering with home improvement TV shows, such as such as Home and Garden TV (HGTV), hashelped large companies build brand awareness. Store events, such as instructional workshops, can drive traffic.Loyalty programs reward frequent customers and generate repeat business.

Many home improvement companies use social media outlets such as Facebook, Twitter, Pinterest, Instagram,and YouTube to connect with customers and share tips and project ideas.

Good service is critical to appealing to both consumer and commercial customers. Companies in the consumersegment need workers who can help individuals seeking basic information and how-to instructions. Sales staff forcommercial customers require in-depth knowledge of building supplies and typically deal with large quantities ofproducts and specific timetables. Long-term relationships with contractors and builders are extremelyimportant in the commercial sector.

Internet sales of hardware and home improvement products are growing rapidly. Most large companies haveretail websites that may offer store and product information, project ideas, how-to instructions, buying guides,and installation quotes. Stores may use websites to sell products with volume too low to justify shelf space.Through the internet, companies offering specialty merchandise, such as high-end bath fixtures, can reachbeyond local markets.

Product prices vary widely. The average transaction size is $20 for hardware stores and $22 at typicalindependent home centers versus $30 at high-profit stores, according to Hardware Retailing. The average ticketis higher at market leaders Home Depot (about $65) and Lowe's (about $75).

Overall sales are somewhat seasonal, peaking in spring and summer as homebuilding, outdoor projects, and lawncare increase. As a result, working capital requirements have historically been greater during the fourthquarter as companies build inventory in anticipation of the spring selling season and experience lower fourthquarter sales volumes. Inventories typically are about 100 days' sales, although larger, more efficient operatorsmay turn inventory more frequently. Working capital requirements are primarily funded through cash generatedfrom operations, but also with short-term borrowings as needed. The working capital turnover ratio for the industryin the US is about 18%. The hardware store industry is labor-intensive: average annual revenue per employee inthe US is about $145,000.

Most large companies offer third-party financing or loan services for both consumers and commercialcustomers to help support large sales. But receivables for the US industry overall average about 25 days' sales.Gross margins are about a third of net sales, while the profit margin for hardware stores is 3.6% compared to3.1% for home centers. Members of cooperatives may receive discounts on purchases or dividends at year-end.

While independent retailers tend to lease store sites, large companies, such as Home Depot and Lowe's, prefer toown property and benefit from lower occupancy costs and greater control.

Working Capital Turnover by Company Size

The working capital turnover ratio, also known as working capital to sales, is a measure ofhow efficiently a company uses its capital to generate sales. Companies should becompared to others in their industry.

Finance & Regulation

Regulation

Local zoning laws can restrict the types of products sold. While building supply stores handling hazardousmaterials must comply with OSHA record keeping requirements, hardware stores are exempt. The federal EnergyPolicy Act gives consumers incentives to buy energy-saving equipment, such as solar heaters and energy-efficient building products. US companies that do business in foreign countries must comply with import andexport requirements and US laws such as the Foreign Corrupt Practices Act.

The global DIY/home improvement retail market, which includes home centers and hardware stores, is projectedto exceed $680 billion in 2025, up from about $580 billion in annual revenue in 2016, according to Global MarketInsights. More than 80% of the global DIY market is concentrated in only eight countries: the US, Germany,Japan, Canada, UK, France, Australia, and Italy, with North America and Europe dominating, according toEuropean Federation of DIY Manufacturers (fediyma). Major companies based outside the US includeKingfisher (UK), Leroy Merlin (France), OBI (Germany), and Lowes-owned RONA (Canada).

Spending per capita on do-it-yourself products is highest in the US, Norway, New Zealand, Germany,Luxembourg, Austria, France, and Canada, according to fediyma. However, many retailers are looking to grow byinvesting in emerging markets such as Eastern Europe, Russia, North Africa, and South America. DIY retailersfrom Chile are active in Argentina, Colombia, and Peru. Some US retailers, such as Lowe's, have chosen nearbycountries for international expansion efforts. Lowe's in 2016 acquired Canada's RONA, creating Canada's largesthome improvement retailer and a stronger competitor to Home Depot of Canada. Lowe's also operates stores inMexico.

China has been a target for home improvement retailers as a result of the country's growing middle class andrise in wages. China represents less than 2% of the world home improvement market and has high potential forgrowth. However, US and European big-box retailers have struggled to establish a foothold there. Home Depotand Kingfisher, for example, have closed some of their stores in China after failing to connect with customers.Problems for foreign DIY chains operating in China have included neglecting to establish needed brandawareness, losing business to local competitors offering steep discounts, and learning that Chinese consumersdo not embrace the "do-it-yourself" mentality that thrives in the US and Europe.

Many home improvement retailers rely on imports to provide low-end or entry-level products in several keycategories, such as the power tool, hardware, and lumber categories. Major exporters of products to the USinclude Canada, China, and Mexico. The Trump administration's escalating trade war with China has saddlednearly all Chinese goods, including cabinets, flooring, plumbing, major appliances, and tile, with tariffs. Largerretailers may negotiate directly with foreign manufacturers to source products. Tariffs, political instability,quotas, trade disputes, transport costs, and exchange rates can affect the cost and supply of imported products.

Change in Dollar Value of US Trade - US International Trade Commission

Imports of hardware to the US come primarily from China, Mexico, Canada, and Taiwan.

Major export markets for US hardware include Mexico, Canada, China, UK, and Japan.

Financial industry data provided by MicroBilt Corporation collected from 32 different data sources and representsfinancial performance of over 4.5 million privately held businesses and detailed industry financial benchmarks ofcompanies in over 900 industries (SIC and NAICS). More data available at www.microbilt.com.

International Insights

3325 HARDWARE

In some US states, companies offer products specifically designed to help homes withstand severe weather ornatural disasters. Florida has additional building codes and special products for hurricane preparedness. Californiahas extra earthquake-resistant design and material building requirements. The rising frequency and severity ofnatural disasters such as hurricanes and wildfires in vulnerable regions is helping drive growth in the homeimprovement market.

Average hourly wages for home improvement retailers overall are moderately lower than the national average.Pay in home centers is slightly higher than that in hardware stores. Some companies rely on part-time workers,especially during key seasonal periods. The injury rate for home centers is twice as high than the US average,due in part to the hazards of dealing with pallet configurations and lifting heavy building supplies.

Industry Employment GrowthBureau of Labor Statistics

Average Hourly Earnings & Annual Wage IncreaseBureau of Labor Statistics

Regional Highlights

Human Resources

Demand: Tied to home building and remodelingNeed good merchandising and competitive pricingRisk: Limited retail pricing flexibility

Industry Growth Rating

How have long-term pricing trends in the home improvement market affected the company?Declining and flat retail prices in key categories for home improvement retailers can affect profitability.

How do residential housing trends affect the company's sales?Home sales, improvement and repair projects, and new residential construction drive sales for homeimprovement stores.

How have large home centers, such as Home Depot and Lowe's, impacted the company?Home Depot and Lowe's dominate the market, accounting for 25% of global market share, according to theEuropean Federation of DIY Manufacturers.

How important are installation services to the company's sales?By offering products and installation, companies can provide a valued service and generate incremental sales.

How do specialty products help the company compete?By specializing in a particular category, such as high-end fixtures or hardware, small companies can offer betterselections and service.

How has the Internet changed how the company does business?Hardware and home improvement products are a fast-growing internet category.

What is the company's strategy for attracting more commercial accounts?Sales staff for commercial customers require in-depth knowledge of building supplies and typically deal with largequantities of products and specific timetables.

How many suppliers does the company have?The supply side of the industry is fragmented. Larger stores can have thousands of vendors.

How big is the company's distribution network?Large chains and cooperatives typically have extensive distribution networks to facilitate shipping from suppliersto stores.

What are the biggest cost savings opportunities in the company's supply chain?

Call Prep Questions

Conversation Starters

Quarterly Industry Update

Operations, Products, and Facilities

Effective supply chain management has allowed large companies to realize significant cost savings and keepprices low.

How does the company decide which products to add or drop?Periodically, companies may have line reviews to decide which products or brands to add or drop.

If the company is part of a cooperative, what have been the main benefits?Membership in a cooperative, such as True Value or Ace, allows independent retailers to leverage a national nameand benefit from volume discounts.

What are the company's best selling categories?Major product categories for home centers include lumber and building supplies (35% of sales); hardware, tools,and plumbing and electrical supplies (25%); and lawn and garden products (10%).

What types of services does the company offer?Companies may also offer installation, delivery, design, or tool rental services.

What are the challenges of managing a large inventory?Large home centers can carry up to 40,000 SKUs and typically have wide selections within product categories.

What brands does the company carry?Companies using a "good-better-best" merchandising strategy may carry products at different price/qualitylevels, including national brand names, exclusive brands, and private-label products.

Who are the company's typical customers?Typical customers include home owners, building contractors, and repairmen.

What does the company do to encourage customer loyalty?Loyalty programs reward frequent customers and generate repeat business.

How does the company ensure good customer service?Companies in the consumer segment need workers who can help individuals seeking basic information and how-toinstructions.

How important are commercial customers?Long-term relationships with contractors and builders are extremely important in the commercial sector.

What are the company's most effective marketing and promotional vehicles?Vehicles include national or local TV, radio, print, and newspaper advertising; direct mail; sponsorships; andinstore displays.

How important is vendor support to the company's marketing efforts?Vendors may provide cooperative advertising allowances.

What types of special events does the company hold?Store events, such as instructional workshops, can drive traffic.

What online marketing strategies have been most successful for the company?Most large companies have retail websites that may offer store and product information, project ideas, how-toinstructions, buying guides, and installation quotes.

How do local zoning laws affect the company's business?Local government zoning laws can restrict the types of products sold.

What procedures does the company have to deal with hazardous materials?While building supply stores handling hazardous materials must comply with OSHA record keeping requirements,hardware stores are exempt.

How has demand for energy-efficient products changed?The federal Energy Policy Act gives consumers incentives to buy energy-saving equipment, such as solarheaters and energy-efficient building products.

How important are imported products?Imports are an important source of supply in the power tool, hardware, and lumber categories.

How does the company attract workers with the experience needed to deal with commercial accounts?Pay in home centers is slightly higher than that in hardware stores due to expertise required to deal with

Customers, Marketing, Pricing, Competition

Regulations, R&D, Imports and Exports

Organization and Management

commercial accounts.

How important is part-time help?Some companies rely on part-time workers, especially during key seasonal periods.

What types of worker training programs does the company offer?Companies may offer training on products, sales techniques, and customer service policies.

How do seasonal sales affect the company's cash flow?Overall sales are somewhat seasonal, with peaks during spring when outdoor projects and lawn care needsincrease.

What are the benefits of providing customer financing?Easy financing for both consumers and commercial customers helps support large sales.

For cooperative members, what are the financial benefits of cooperative membership?Members of cooperatives may receive discounts on purchases or dividends at year-end.

What are typical lease terms for the company's store(s)?While independent retailers tend to lease store sites, large companies, such as Home Depot and Lowe's, prefer toown property and benefit from lower occupancy costs and greater control.

How has price-based competition affected the home improvement industry?Heavy advertising by large companies often exaggerates price gaps.

How has demand changed for environmentally friendly products?Growing consumer concern over global warming, environmental causes, and energy savings has increaseddemand for environmentally friendly home improvement products, such as sustainable wood cabinets andrecycled glass tiles.

How important is customer service when competing with larger retailers?Small, independent hardware stores typically compete with big box retailers by offering better, more personalservice.

How has technology improved the retail experience in the home improvement industry?Home improvement retailers are adding interactive elements to stores to increase sales.

Financial Analysis

Business and Technology Strategies

Challenge: Lowe's Challenging Home Depot for Professional Customers - A strategic decision by Lowe's tochallenge Home Depot's dominance of the professional customer segment could have a broader impact on otherhome centers and hardware stores seeking to grow (or merely maintain) their business with pro customers. TheUS's second-largest home improvement chain said it added more than 35,000 new professional accounts in thesecond quarter of 2019, adding it's in the early stages of its strategy to grow the commercial segment of itscustomer base. (Lowe's didn't disclose the total number of professional customers it has for competitivereasons.) By comparison, Home Depot recently said it's on track to reach 1 million pro customers in 2019.Efforts by historically DIY-focused Lowe's to attract more professional customers include bulking up on suppliesto ensure adequate inventory, providing preferred parking spaces for contractors, and offering dedicatedassociates and supervisors at pro desks and pro areas of its stores, according to Fool.com. Professionalcontractors make attractive customers because they make frequent large purchases. In addition, theprofessional market is growing at a much faster pace than the consumer segment: Industry sales to procustomers was projected to grow at about 10% in 2018, compared to just under 5% for consumers, according tothe Home Improvement Research Institute.

Industry Impact - As Lowe's seeks to grow its business with professional customers -- and Home Depot seeksto defend and extend its dominance of the sector -- smaller players like Menards and Ace Hardware couldbecome collateral damage if they fail to up their game.

Trend: Exurban Growth - The affordability crisis in the US housing market is driving home buyers far beyond

Quarterly Industry Update

11.4.2019

6.10.2019

downtowns and suburbs to the far-flung exurbs, according to data from the National Association of HomeBuilders. Exurbs -- defined by the Home Building Geography Index as outlying counties of major metropolitanareas -- were the only region to show net single-family permit growth on a year-over-year basis in the first quarterof 2019, posting a 1.6% gain. Last year, single-family construction rose nearly 7% in exurban areas comparedwith a year earlier, while homebuilding overall rose less than 3% over the same period. Buyers, often millennialsand retirees, purchased homes on average more than 16 miles from central business districts in 2018, thegreatest distance since 2004, according to Fannie Mae loan data cited in The Wall Street Journal. While exurbanareas account for only 9% of single-family home construction nationally, their share is growing.

Industry Impact - Home centers and hardware stores looking to add new locations may want to build in or nearerto exurban areas, which are leading the US in new homebuilding, an indicator of demand for the sector.

Opportunity: Small Store Maximizes Sales Using Inventory Management - Hardware stores can focus oninventory management to help increase sales per square foot, according to Hardware Retailing magazine's recentprofile of Kendall's Ace Hardware in St. Paul, Minnesota. The high-profit store boasted sales of $422 per squarefoot in 2018 -- more than twice the industry average, and on par with Home Depot, after downsizing space from7,500 to 5,300 square feet. Kendall's made inventory management changes such as putting departmentmanagers in charge of buying their own stock, and identifying core product categories (like hand tools and paintbrushes) that have the greatest impact on sales in the local market. Overall, inventory productivity improved attypical hardware stores in 2018, driving average sales per square foot to an all-time high of $193, according tothe North American Retail Hardware Association's (NRHA) 2018 Cost of Doing Business Study. Inventory turnedon average 2.4 times a year among the study's hardware store participants. Top performing hardware stores alsoworked to keep a lid on payroll -- a challenge in today's tight labor market -- and other expenses, the NRHA studyfound.

Industry Impact - While stocking ample supplies of a wide variety of products can be challenging for hardwarestores with small sales floors, it's crucial to driving sales and competing with online retailers that have access tovirtually unlimited inventory.

Challenge: Slower Growth in Home Remodeling - Slowing growth in residential remodeling could spell troublefor home improvement retailers. After reaching a projected decade-high of 7.7% in the fourth quarter of 2018,year-over-year increases in residential remodeling expenditures are expected to trend downward in 2019,according to a recent report by Harvard University's Joint Center for Housing Studies (JCHS). Business at homeimprovement retailers had previously been soaring, largely on the back of increased remodeling activity. Theuptick had been driven by a slow recovery in new home builds following the Great Recession. However,mortgage rates have been rising, putting a lid on home sales that tend to spur investments in remodeling andrepair. After peaking in 2018, remodeling activity is projected to drift downward to 6.6% through the third quarterof 2019, according to the Leading Indicator of Remodeling Activity.

Industry Impact - Home centers and hardware stores may want to adjust their inventory, marketing, and/ormerchandising strategies to meet projected slowing growth in home improvement and repair spending in 2019.

3.11.2019

12.3.2018

US consumer spending on durable goods, an indicator of home center and hardware sales, fell 1.0% in October2019 compared to the same month in 2018.

The value of US residential construction spending, a key indicator of home center and hardware store sales,dropped 7.1% year-to-date in October 2019 compared to the same period in 2018.

US retail sales for building material and garden equipment and supplies dealers, a potential measure of homeimprovement and hardware supply demand, increased 0.4% in the first eleven months of 2019 compared to thesame period in 2018.

Industry Indicators

The value of US new residential home construction and renovations, an indicator for home centers and hardwarestores, is forecast to grow at an annual compounded rate of 5% between 2019 and 2023. Data Published: August2019

Industry Forecast

First Research forecasts are based on INFORUM forecasts that are licensed from the Interindustry EconomicResearch Fund, Inc. (IERF) in College Park, MD. INFORUM's "interindustry-macro" approach to modeling theeconomy captures the links between industries and the aggregate economy. Forecast FAQs

Changes in the economic environment that may positively or negatively affect industry growth.

Data provided by First Research analysts and reviewed annually

Interest Rates Change in prime and related interest rates

Construction Spending Change in the overall level of commercial and residential construction spending

Consumer Spending Change in overall level of consumer spending on goods and services

Industry Drivers

Unfavorable Retail Pricing Trends - Declining and flat retail prices in key categories for home improvementretailers can affect profitability. Retail prices for tools, hardware and supplies fell by about 2% between 2013 and2018; prices for outdoor equipment and supplies were down 3% over the same period. With limited retail pricingflexibility due to competition and increasing manufacturer prices, companies struggle to maintain margins.

Dependence on Housing Market - Home sales, improvement and repair projects, and new residentialconstruction drive sales for home improvement stores. The residential real estate market can be cyclical andinfluenced by economic conditions. Decreases in home turnover and slower price appreciation, which limitsdiscretionary consumer spending, can lead to fewer home improvement projects. Home centers, particularlythose that depend on builders and contractors, are vulnerable to changes in housing starts.

Critical Issues

Dominance of Large Companies - Home Depot and Lowe's dominate the market, accounting for 25% of globalmarket share, according to the European Federation of DIY Manufacturers. Volume discounts allow largecompanies to offer extremely competitive prices. Most large home centers provide a wider variety of productsand carry building supplies that small hardware stores don't stock. Large companies also have the resources tocater to builders and contractors.

Business Challenges

Dependence on Weather - Extremes in weather conditions or prolonged periods of unseasonable weather canaffect sales in important categories for home improvement retailers. Wet or cold weather during spring andsummer can affect sales of outdoor products, such as lawn care equipment and landscaping supplies. Warmwinters can reduce sales of cold weather products, such as snowblowers.

Product Liability and Recalls - Product recalls present liability and financial problems for home improvementretailers. Faulty products, such as power tools and cleaning chemicals, can be extremely hazardous and causesevere injury. Litigation due to unsafe products can be expensive and damage a company's reputation. Recallscan be time-consuming and costly.

Reliance on Imports - Companies rely on imports to provide low-end or entry-level products in several keycategories of the home improvement market. Tariffs, quotas, trade disputes, and exchange rates can affect thecost and supply of imported products. Imports are a significant percentage of the US market for hardware andpower tools. Tariffs imposed in 2018 by the US Commerce Department on Canadian softwood lumber havedriven up imported lumber prices. More recently, exports of building materials from China were slapped with UStariffs.

Complex Inventory Management Needs - Because home improvement retailers stock thousands of products,managing inventory can be a challenge. The sheer number of stock keeping units can make purchasing,reordering, distribution, and receiving unmanageable. Even small format hardware stores can have up to 13,000items in available inventory. Computerized inventory management systems are a critical part of operations forlarge companies.

More Green Products - Growing consumer concern over global warming, environmental causes, and energysavings has increased demand for environmentally friendly home improvement products, such as sustainablewood cabinets and recycled glass tiles. Home Depot's Eco Options program identifies products that minimallyimpact the environment, including all-natural pesticides, energy-saving appliances, and LED light bulbs. Thenumber of building projects seeking Leadership in Energy and Environmental Design (LEED) certification, whichsets standards for green buildings, is increasing.

Private-Label and Exclusive Brands - Large companies are enhancing merchandise selection and developing acompetitive advantage by selling more private-label and exclusive products. Private-label brands typically offerhigher margins to stores and better value to customers than branded. Exclusive brands often allow companies toprovide high-end, better performing products. The True Value cooperative carries thousands of private-labelitems. Both Home Depot and Lowe's stock exclusive brands in multiple categories.

More Interactive Retail Experiences - Home improvement retailers are adding interactive elements to stores toincrease sales. Live product demonstrations, televised demos, and how-to classes educate customers and helpsell merchandise. Stations allowing customers to try tools can demonstrate benefits and promote high-endproducts. Interactive kiosks allow customers to view different paint colors in a variety of settings.

New Payment Options - Home Depot began accepting PayPal accounts as a form of payment in stores in2012. Giving consumers more options on how to pay for their purchases could attract new customers andencourage customers to buy more to earn special rewards. PayPal and other alternative payment methods willlikely continue to become part of the in-store check out process, as technologies advance.

Business Trends

Installation Services - By offering products and installation, companies can provide a valued service andgenerate incremental sales. Finding good installers for major projects, such as new flooring or millwork, can bedifficult for traditional customers. Lowe's has project managers, separate from sales staff, to manage the detailsof installations, which accounted for about 7% of the company's total sales in 2018. Companies may offerin-home sales services for larger projects, such as generators or air conditioning systems.

Category Specialization - By specializing in a particular category, such as high-end fixtures or hardware, smallcompanies can offer better selections and service. Focusing on a category allows companies and workers todevelop expertise and differentiate from big box retailers. Specialized hardware stores can offer faster turnaroundby stocking items most larger retailers must special order.

Internet Sales - Hardware and home improvement products are a fast-growing internet category. Home Depot,for example, saw sales from online channels increase more than 25% in 2018 versus 2017. Some largecompanies offer in-store pick up for merchandise ordered online. Almost 50% of Home Depot's online orders

Industry Opportunities

were picked up in a store in 2018.

Superior Customer Service - Small, independent hardware stores typically compete with big box retailers byoffering better, more personal service. Providing superior service allows companies to attract customers who areless price sensitive. Knowing regulars by name, providing free delivery for heavy products, and offering houseaccounts to long-standing customers helps develop loyalty. Walking a customer through a do-it-yourself job cancreate a relationship and generate related-item sales.

Targeted Marketing - Companies can develop customer loyalty by creating programs specifically targeting keydemographics. Home Depot has special efforts targeting Hispanics, including bilingual signage, Hispanic hiringinitiatives, and a culturally relevant paint palette. Lowe's targets women with organized stores, better lighting,designer décor, and high-end appliances. Women initiate 80% of home improvement projects, according toMarketing to Women research.

Equipment Rental Opportunities - The US equipment rental market, a potential revenue source for homeimprovement retailers, could climb to $55.6 billion by 2019, according to the ARA Rental Market Monitor forecastfrom the American Rental Association. Growth drivers include higher consumer spending and an improvedconstruction market. US home improvement retailers offering equipment rental will want to be staffed and haveenough inventory for the expected uptick in demand.

Competing with Big Box RetailersHome Depot and Lowe's dominate the home improvement industry and have forced many independent hardwareretailers out of business. Large home centers offer a wide variety of categories, thousands of product choices,and extremely low prices on popular items. To compete, small companies must offer unique products, providesuperior customer service, or serve markets overlooked by large retailers. Most independent hardware storessurvive by developing long-term relationships with customers.

Developing Dynamic Merchandising StrategyBecause home improvement retailers can deal with thousands of vendors and a constantly changing productselection, establishing the right mix of merchandise can be a challenge. Many companies implement periodiccategory or product line reviews to help optimize merchandising mix. Frequent reviews help retailers integrate newproducts and keep selection fresh.

Providing Customer FinancingHome improvement projects can be costly, and waiting for a customer or small contractor to obtain funding canhinder sales. Most large retailers offer third-party credit or loans to individual and commercial customers. Smallcompanies may provide house accounts to frequent customers.

Developing Competitive Pricing StrategyLarge home improvement retailers compete by aggressively promoting low prices. Joining a cooperative can helpsmall companies achieve volume discounts and improve pricing flexibility. Companies may also develop market-specific pricing strategies to address local competition.

Implementing Database MarketingHome improvement retailers cater to different types of customers with varying needs. Computerized databasesallow companies to create marketing programs based on precise criteria and target customer groups moreeffectively. Using databases, companies may segment customers by purchase activity, loyalty groupmembership, new home ownership, or demographics.

Implementing Inventory Management SystemsHome centers and hardware stores deal with thousands of stock-keeping units (SKUs). Product availability iscritical, especially for contractors and customers with repair jobs. Computerized inventory management systemshelp companies track sales and availability of individual items. Some systems have automatic replenishmentfeatures to ensure reorders when inventory runs low.

Delivering Superior Customer Service.

Executive Insight

Chief Executive Officer - CEO

Chief Financial Officer - CFO

Chief Information Officer - CIO

Human Resources - HR

Poor service can ruin a company's reputation. Negative customer experiences can detrimentally affect sales,especially in small communities. True Value uses mystery shoppers to help identify service issues. Somecompanies, particularly those selling to builders, have minimum experience requirements for sales associates toensure quality service.

Ensuring Worker SafetyThe industry injury rate in home centers is significantly higher than the US average. Because home centers sellmore building supplies, workers must deal with the hazards of handling large, heavy products (such as lumber) ina warehouse environment. Companies may offer worker safety training courses and promote back supportdevices to minimize injuries.

Improving Value PerceptionsSmall hardware stores suffer from the perception that they have high retail prices. Heavy advertising by largecompanies often exaggerates price gaps. While large retailers do offer deep discounts on some goods,independent retailers often have comparable prices in many categories. Carrying name-brand goods atcompetitive prices helps improve perceived value. Providing superior service also adds customer value in anintangible way.

Targeting Special DemographicsCompetition for the standard home improvement customer can be intense and often based on price. By targetingnon-traditional demographics, companies can develop new customer bases and grow sales. Retailers may targetwomen, the demographic that initiates the majority of home improvement projects, by sponsoring design TVshows and holding women-only how-to workshops. Home Depot has targeted Hispanics with hiring initiatives anda paint palette reflecting Hispanic culture.

VP Sales/Marketing - Sales

How does the company compete with Home Depot and Lowe's?To compete, small companies must offer unique products, provide superior customer service, or serve marketsoverlooked by large retailers. Most independent hardware stores survive by developing long-term relationshipswith customers.

What does the company consider when selecting merchandise?Many companies implement periodic category or product line reviews to help optimize merchandising mix.Frequent reviews help retailers integrate new products and keep selection fresh.

What types of customer financing programs does the company offer?Most large retailers offer third-party credit or loans to individual and commercial customers. Small companiesmay provide house accounts to frequent customers.

How does the company address price-based competition?Joining a cooperative can help small companies achieve volume discounts and improve pricing flexibility.Companies may also develop market-specific pricing strategies to address local competition.

What tools does the company use to segment customers?Computerized databases allow companies to create marketing programs based on precise criteria and targetcustomer groups more effectively.

What types of technology does the company use to manage inventory?Computerized inventory management systems help companies track sales and availability of individual items.Some systems have automatic replenishment features to ensure reorders when inventory runs low.

How does the company prevent customer service problems?True Value uses mystery shoppers to help identify service issues. Some companies, particularly those selling tobuilders, have minimum experience requirements for sales associates to ensure quality service.

Executive Conversation Starters

Chief Executive Officer - CEO

Chief Financial Officer - CFO

Chief Information Officer - CIO

Human Resources - HR

What programs does the company offer to minimize worker injuries?Companies may offer worker safety training courses and promote back support devices to minimize injuries.

How does the company address perceived value disparity when compared to large retailers?Carrying name-brand goods at competitive prices helps improve perceived value. Providing superior service alsoadds customer value in an intangible way.

What specific customer groups is the company targeting?By targeting nontraditional demographics, companies can develop new customer bases and grow sales. Somelarge retailers target women and Hispanics.

VP Sales/Marketing - Sales

Quick Ratio by Company Size

The quick ratio, also known as the acid test ratio, measures a company's ability to meet short-term obligationswith liquid assets. The higher the ratio, the better; a number below 1 signals financial distress. Use the quick ratioto determine if companies in an industry are typically able to pay off their current liabilities.

Current Liabilities to Net Worth by Company Size

The ratio of current liabilities to net worth, also called current liabilities to equity, indicates the amount duecreditors within a year as a percentage of stockholders' equity in a company. A high ratio (above 80 percent) canindicate trouble.

Financial Information

COMPANY BENCHMARK TRENDS

Financial industry data provided by MicroBilt Corporation collected from 32 different data sources and represents financial performance of over4.5 million privately held businesses and detailed industry financial benchmarks of companies in over 900 industries (SIC and NAICS). Moredata available at www.microbilt.com.

Data Period: 2018 Last Update November 2019

Table Data Format Mean

Company Size All Large Medium Small

Size by Revenue   Over $50M $5M - $50M Under $5M

Company Count 10238 33 715 9490

Income Statement

Net Sales 100% 100% 100% 100%

Gross Margin 32.5% 31.6% 33.4% 33.6%

Officer Compensation 2.3% 1.8% 2.4% 3.2%

Advertising & Sales 1.2% 1.2% 1.2% 1.2%

Other Operating Expenses 25.9% 25.5% 26.6% 26.1%

Operating Expenses 29.4% 28.5% 30.1% 30.5%

Operating Income 3.1% 3.1% 3.2% 3.1%

Net Income 1.6% 1.5% 1.6% 1.6%

Balance Sheet

Cash 6.3% 5.8% 6.8% 7.0%

Accounts Receivable 15.8% 17.1% 14.6% 14.1%

Inventory 43.8% 42.8% 44.2% 45.4%

Total Current Assets 69.2% 69.0% 69.0% 69.9%

Financial industry data provided by MicroBilt Corporation collected from 32 different data sources and represents financial performance of over4.5 million privately held businesses and detailed industry financial benchmarks of companies in over 900 industries (SIC and NAICS). Moredata available at www.microbilt.com.

COMPANY BENCHMARK INFORMATION

NAICS: 44411, 44413

Property, Plant & Equipment 21.0% 21.6% 21.0% 19.8%

Other Non-Current Assets 9.7% 9.4% 10.0% 10.3%

Total Assets 100.0% 100.0% 100.0% 100.0%

Accounts Payable 13.7% 13.4% 13.8% 14.1%

Total Current Liabilities 26.6% 25.7% 27.5% 27.6%

Total Long Term Liabilities 23.1% 20.7% 24.2% 27.0%

Net Worth 50.3% 53.6% 48.4% 45.4%

Financial Ratios

(Click on any ratio for comprehensive definitions)

Quick Ratio 0.87 0.93 0.81 0.80

Current Ratio 2.60 2.68 2.51 2.53

Current Liabilities to Net Worth 52.9% 48.1% 56.9% 60.7%

Current Liabilities to Inventory x0.61 x0.60 x0.62 x0.61

Total Debt to Net Worth x0.99 x0.87 x1.07 x1.20

Fixed Assets to Net Worth x0.42 x0.40 x0.44 x0.44

Days Accounts Receivable 24 26 23 21

Inventory Turnover x3.74 x3.92 x3.58 x3.55

Total Assets to Sales 42.5% 41.9% 43.5% 42.6%

Working Capital to Sales 18.1% 18.1% 18.1% 18.0%

Accounts Payable to Sales 5.6% 5.4% 5.8% 5.8%

Pre-Tax Return on Sales 2.5% 2.4% 2.7% 2.5%

Pre-Tax Return on Assets 5.9% 5.8% 6.1% 5.9%

Pre-Tax Return on Net Worth 11.8% 10.8% 12.6% 13.1%

Interest Coverage x4.46 x4.31 x4.74 x4.32

EBITDA to Sales 4.4% 4.3% 4.4% 4.3%

Capital Expenditures to Sales 1.8% 1.8% 1.9% 1.8%

Financial industry data provided by MicroBilt Corporation collected from 32 different data sources and represents financial performance of over4.5 million privately held businesses and detailed industry financial benchmarks of companies in over 900 industries (SIC and NAICS). Moredata available at www.microbilt.com.

ECONOMIC STATISTICS AND INFORMATION

Annual Construction put into place - Census Bureau

Home Centers & Hardware Stores

Acquisition multiples below are calculated medians using at least 3 US private industry transactions completed

between 1/2008 and 12/2019 and are based on middle-market transactions where the market value of invested

capital (the selling price) was less than $1B. Data updated annually. Last updated: December 2019.

Valuation Multiple MVIC/Net Sales MVIC/Gross Profit MVIC/EBIT MVIC/EBITDA

Median Value 0.3 0.6 2.7 1.2

Annual Retail Sales Growth - Census Bureau

Change in Consumer Prices - Bureau of Labor Statistics

VALUATION MULTIPLES

MVIC (Market Value of Invested Capital) = Also known as the selling price, the MVIC is the total consideration

paid to the seller and includes any cash, notes and/or securities that were used as a form of payment plus any

interest-bearing liabilities assumed by the buyer.

Net Sales = Annual Gross Sales, net of returns and discounts allowed, if any.

Gross Profit = Net Sales - Cost of Goods Sold

EBIT = Operating Profit

EBITDA = Operating Profit + Noncash Charges

SOURCE: DealStats (formerly Pratt's Stats), 2019 (Portland, OR: Business Valuation Resources, LLC). Used with permission. DealStats isavailable at https://www.bvresources.com/learn/dealstats

Hardware RetailingNews.

Hardware+Building Supply DealerNews, surveys.

Home DepotProduct trends from major home improvement retailer.

Home Improvement Retailing (Canada)News, events, and classifieds.

National Association of Home BuildersBuilding news and trends from trade association.

North American Retail Hardware AssociationNews, industry statistics (annual survey), operating strategies, legislative issues from trade association.

US Census - Construction StatisticsConstruction trends.

Industry Websites

DIFM - do-it-for-me

DIY - do-it-yourself

HGTV - Home and Garden TV

LEED - Leadership in Energy and Environmental Design

NAHB - National Association of Home Builders

NRHA - North American Retail Hardware Association

POS - point-of-sale

SKU - stock-keeping unit

Glossary of Acronyms