Flooring News and Information

Atlanta, GA, Dec 27—Home Depot and Lowe's are poised to gain market share in 2002, putting pressure on smaller rivals, according to analysts. The two retailers, which last year were hurt by deflation in lumber and building materials prices, are expected to see sales growth over the next six to 12 months, largely on the strength of the U.S. housing market.

Patrick Jeffrey, a Standard & Poor's analyst who follows the retailers, said mortgage refinancings spurred by lower interest rates aided Home Depot and Lowe's during 2001. He sees home purchases also increasing store traffic, helping the two extend market share.

"The demographics are still good for home ownership," Jeffrey said.

Jeffrey said the September 11 attacks in New York and near Washington led many people to travel less and devote more attention to home.

According to Prudential Financial, Home Depot has an 11% share of the $472 billion home improvement market. Lowe's has a roughly 5% share.

Barbara Allen, an analyst at Arnhold & S. Bleichroeder, expects Lowe's to grab market share quicker than Home Depot as it expands to metro markets served by its larger rival. She said many shoppers find Lowe's stores, which feature soft lighting and neatly organized rows of products, more visually appealing than Home Depot's. She said sales at stores open at least a year suggest Lowe's may be taking customers from Home Depot in markets where both retailers have stores.

For example, for its 2001 fiscal third quarter, Lowe's posted a 4% rise in same store sales, while Home Depot's same store sales were flat. The two companies' fiscal quarters ran at about the same time, with Lowe's ending November 2 and Home Depot's ending October 28.

"Lowe's has been beating the pants off Home Depot in same store sales as well as revenue growth per store," Allen said.

Home Depot has scaled back overall store openings to about 200 a year over the next three years. For 2001, the company planned to open 204 stores versus the 225 openings the company had previously estimated. The move reflects a focus on improving existing stores and reducing cannibalization, which occurs when the entry of a newer store in a market hurts sales at an existing store.

Cannibalization "is a very big deal for Home Depot," stripping 6 % to 8% from the company's same store sales, estimated Colin McGranahan of Sanford Bernstein. Home Depot has over 1,300 stores in the U.S., Canada, and Mexico.

Lowe's, on the other hand, is increasing store openings. It planned to open 115 stores this year, 123 stores in fiscal 2002, and 130 stores in 2003, mostly in larger markets. Lowe's has more than 740 stores in the U.S.

As Home Depot and Lowe's grow, smaller players in home improvement will likely feel the pinch. In recent months, the economic slowdown has knocked out some smaller companies, including House2Home, which filed for Chapter 11 bankruptcy protection in November. Smaller competitors also include Ace Hardware and TruServ’s True Value Hardware.

"The smaller players need to distinguish themselves in some other way from the larger players," said Jeffrey of S&P. "It's very hard for them to compete on price."