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Housing Bubble Taking Toll on Home Improvement Chains

The aisles at home improvement giants Home Depot and Lowe’s are featuring a lot of items you probably wouldn’t expect. This year, they’re stocking shelves with plasma televisions, digital cameras, and even Christmas CDs.

Home improvement retailers are auditioning a myriad of products to offset the decline in sales of construction materials, appliances and hardware due to the slowdown in single-family home sales.

The National Association of Realtors, reported on Dec. 11 that housing starts in 2006 fell 12.3 percent to of 1.82 million units. The trade group estimates that sales of new homes fell 17.7 percent and existing home sales fell 8.6 percent.

The home center operators are feeling a double-whammy. Slow home sales mean fewer consumers are buying new appliances and tackling do-it-yourself projects. It also hits the retailers in the commercial side, where at Home Depot contractors, who make purchases through HD Supply, accounted for $3.5 billion or 15 percent of its $23.1 billion in sales for the most recent quarter.

So, it’s beginning to look a lot like Wal-Mart in some aisles of your local home center. “They are using the holidays to test new products,” says Steve Spiwak, senior consultant, Retail Forward, a retail management and consulting firm. “They’re saying, ‘Let’s put it on the shelves and see if it moves.’ ”

Home Depot quadrupled its Christmas inventory compared to last year, adding more than 320 items in the holiday décor category alone. Lowe’s also increased its selection, but declines to say by how much.

Both chains are using décor as bait to steer consumers to other items. “When customers come in to pick up their Christmas tree, lights and decorations they can also select among the eight electronic items we are carrying for the holiday,” says a spokesperson for Home Depot.

For now, Home Depot says it has no plans to stock the new consumer items beyond the Christmas holiday. But, if these products sell well, analysts expect the chain to keep such items in year-round inventory. “We are always looking for ways to increase sales,” says a spokesperson.

In August, citing a challenging second half, Home Depot warned that its full-year results could fall short of expectations. This past summer, the Atlanta-based home improvement chain took the unusual move of stopping the industry-standard practice of reporting same store sales as part of its quarterly reports. However, with the most recent quarter that ended October 29, it resumed reporting same store sales. During the third quarter, comparable store sales declined 5.1 percent.

Lowe’s reported its same store sales fell 4 percent during the three months ended November 3. Robert Niblock, the president and CEO, attributed some of the drop to the effects of a slowing housing market.

Lowe’s says that it doesn’t foresee adding electronics in its merchandise mix to make up for slower sales in traditional lines. “We are continuing to focus on our core products,” says a spokesperson for Lowe’s. “We are not making any knee-jerk decisions based on the economy.”

Some recent changes at the chains may be permanent, however. Lowe’s has positioned beverage dispensers stocked with Gatorade and bottled water near its checkouts. And in August, Home Depot put out candy.

Len Teitelbaum, managing director of the Roosevelt Investment Group and a former analyst at Merrill Lynch, says the gross won’t amount to much.

“But, every little bit helps,” he says. “I would bet you someone from Lowe’s is shopping Home Depot to see the turns on candy.”

It may not make up for lost sales of washers and aluminum siding, Spiwak says, but it’s “a low-risk way to eke out more sales and margin from existing floor space.”

Riccardo A. Davis

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