Remodel Market Stable in '04

Special to CONTRACTOR NEW YORK The ratings on major retailers in the home-improvement market should remain relatively stable into 2004 as industry leaders such as Home Depot and Lowes continue to expand their number of stores, focus on improving operating efficiencies and increase their emphasis on reaching professional contractors, Standard & Poors Ratings Services reported Aug. 22. Industry demographics

Special to CONTRACTOR

NEW YORK — The ratings on major retailers in the home-improvement market should remain relatively stable into 2004 as industry leaders such as Home Depot and Lowe’s continue to expand their number of stores, focus on improving operating efficiencies and increase their emphasis on reaching professional contractors, Standard & Poor’s Ratings Services reported Aug. 22.

“Industry demographics continue to remain favorable, as home ownership continues to increase and mortgage rates remain at low levels,” said S&P’s credit analyst Patrick Jeffrey. “Favorable demographics exist despite the continued weak U.S. economy.”

Home-improvement centers continue to increase their focus on professional contractors to expand their customer bases beyond the core do-it-yourself and build-it-yourself customer base. S&P’s believes this expansion increases home-improvement centers’ potential market to more than $400 billion.

The core DIY/BIY market achieved 5% annual growth throughout the 1990s, based on the growth of the U.S. economy and the housing market during that period. Moreover, the aging baby boomer population continues to increase the rate of home ownership in the United States.

Despite somewhat slower growth since the second half of fiscal 2000, the home-improvement market has benefited from a strong housing market that has been supported by low mortgage rates. Should the housing market decline significantly, S&P’s believes home-improvement centers could offset the slowdown because repair and remodeling work on existing homes could increase if new home purchasing slows.

As to what type of remodeling is being done, American Standard recently released findings from its survey that shows kitchens top the list of home-improvement projects. One in four (26%) chose a kitchen renovation, and a central heating and cooling system upgrade was close behind with 20%. Next was building a deck with 15%, followed by a bathroom renovation (9%), master bedroom expansion (9%) and creating a wine cellar (2%). Other home renovations were on the mind of 19% of respondents.

“Just like the poll commissioned by American Standard, the results of a recent American Society of Interior Designers’ Web survey showed that kitchen remodeling is a top design choice of consumers,” said ASID President H. Don Bowden. “The reason is the kitchen is a very important part of the home. The kitchen has evolved into more than a place to cook and eat — it is now the social gathering area in the home.”

According to the National Association of Home Builders, an average of 46.9% of the population made minor home renovations ($25,000 or less) and 42.4% had major renovations ($25,000 or more) in the first quarter of 2003. More than half the respondents (55%) chose a kitchen, bathroom, or central heating and cooling upgrade as their first choice to increase their home comfort level.

Although not a first choice in the American Standard poll, nearly half of respondents (47%) said they would choose a bathroom remodeling as one of their top three preferences for a home improvement.

Home Depot and Lowe’s are poised to capture a substantial portion of this remodeling work. The companies’ combined sales in 2002 represented about 20% of the total market.

S&P’s expects Home Depot and Lowe’s to continue to expand their store bases, which should result in further gains in market share over the next several years. Home Depot is expected to continue growing at somewhat slower rates as it focuses on improving operating efficiencies and the overall shopping experience in its stores.

The ratings on Home Depot (AA/Negative/A-1+) and Lowe’s (A/Stable/A-1) remain at the high end of the investment-grade rating category. S&P’s report, “Home Improvement Retail Sector Remains Stable Despite Continued Weak Economy,” can be found on RatingsDirect, S&P’s Web-based credit analysis system, at www.ratingsdirect.com.