How stimulating are the stimulus checks?
May will be a month filled with heady questions about the economy, with a close eye on how American consumers will fare with a little extra money in their collective pockets.
While many retailers are hoping Congress’s tax rebate stimulus checks will help usher individual consumers back into stores, builders and realtors are hoping the checks and other reforms will aid the struggling housing market. Consumers, meanwhile, appear split on where they’ll be spending the money.
Because of their role in monitoring Americans’ loans, the major U.S. credit reporting agencies have taken a special interest in the issue—according to TransUnion, a recent consumer survey showed 42 percent of respondents said they planned to pay down debt in some way with the additional funds. Twenty percent said they would save the money, and 16 percent said they would buy something they deemed necessary. Five percent reported they would “splurge.”
Credit reporting agency Experian broke down numbers from a similar survey in a different way—10 percent of respondents said they would spend at least some of the stimulus money on home repairs, and 4 percent said they planned to buy furniture or appliances.
Retailers are trying their best to court those who are planning to spend the money—several chains have offered stimulus check-specific promotions.
On May 1, Home Depot launched an ad campaign to en courage taxpayers to invest the stimulus checks in environmentally friendly products. The multi-pronged approach has included direct mail advertisements, radio spots and information on homedepot.com. In-store, another part of the May campaign, includes promotions on compact fluorescent light bulbs and Energy Star appliances.
“We will educate consumers on ways they can turn a short turn stimulus into a long-term investment by purchasing Eco Options products,” according to Home Depot representative Jean Niemi. Eco Options is Home Depot’s labeling program for environmentally friendly items.
Sears is trying a different route, giving a 10 percent bonus for gift cards purchased with stimulus check funds, provided the customer cashes in the full value of the check. The promotion only extends to customers who will receive paper checks. The cards can be used at any of Sears Holdings’ retailers, including Kmart and Lands’ End stores, as well as on the Web. Sears is promoting its stimulus check program with targeted e-mails, direct mail, online advertisements and in circulars.
In its own marketing campaign, the National Association of Home Builders (NAHB) has capitalized on the month of May as “National Home Remodeling Month,” with a campaign encouraging consumers to “invest wisely” on lower-cost, higher-value home improvement projects. Some of the projects the organization has highlighted include fixing drafts for better air flow; replacing siding; adding a small bathroom; and adding a deck, patio or porch.
The NAHB initiative gives some insight on how professionals are viewing the stimulus checks and how they might help the overall housing market. But despite the media focus on the checks themselves, other aspects of the federal economic stimulus plan actually are meant to benefit the housing sector more.
Those homeowners with high-cost mortgages, for example, particularly in areas with higher overall home prices like California, might be the first to benefit from a greater pool of home buyers if one major mortgage change works. The stimulus plan will temporarily raise the amount allowed form mortgages issued by Fannie Mae and Freddie Mac, the government-sponsored loan agencies. Under the plan, those two agencies can offer mortgages valued up to $729,750, significantly higher than the previous cap of $417,000.
The NAHB has praised the economic stimulus package in part—the group has lobbied hard for an overarching housing stimulus package, taking out a full-page ad in USA Today and holding several talks with members of Congress. But the group has also said more components will be needed in the coming months to stop the housing market from being “a serious drag on economic growth until the beginning of 2009,” in the words of NAHB chief economist David Seiders.
The NAHB is continuing to lobby for further reforms, including a tax credit on the purchase of a home and expanding the “net operating loss” tax deduction. While the former issue is meant to reduce home inventory, the latter issue is meant to benefit builders specifically. If that initiative were met with approval, the many builders who have experienced losses could reach back further into their profitable years and receive a rebate on taxes paid.
Paul Lopez, a spokes person for the NAHB, said while those issues—separate from Congress’s approved stimulus package—are yet to be decided, the group is cautiously watching the issues. “Until we see what the final House bill looks like, we are not doing media interviews on the subject,” he said.
Of the plan already approved by Congress, however, a third component does include tax breaks to businesses, most notably a 50 percent bonus deduction for depreciation of equipment. The bonus is meant to speed up a tax credit on depreciating assets and can apply to any asset put into use during 2008. The deduction includes tangible property and information technology items like computers and software.
In the end, it will take time for the full value of the stimulus plan to be realized and to see whether it will have the desired effect for the housing market. In the interim, it’s average taxpayers who will offer the most immediate view into whether the plan can spur consumer spending, when retail sales figures arrive at the end of May.
Home Depot to close 15 stores
Home Depot will close 15 underperforming stores, the company has announced, and remove 50 future openings from the new store pipeline. The closings will include layoffs of about 1,300 employees.
The closings, at locations in the Midwest and Northeast, will generate approximately $547 million in pre-tax charges in the company’s first quarter. The company will release first-quarter results on May 20.
The stores to be closed are as follows:
• Store no. 2015 in East Fort Wayne, Ind.
• Store no. 2032 in Marion, Ind.
• Store no. 2310 in Frankfort, Ky.
• Store no. 379 Opelousas, La.
• Store no. 2819 Cottage Grove, Minn.
• Store no. 6901 East Brunswick, N.J.
• Store no. 6904 Saddle Brook, N.J.
• Store no. 6171 Rome, N.Y.
• Store no. 3702 Bismarck, N.D.
• Store no. 3874 Findlay, Ohio
• Store no. 3865 Lima, Ohio
• Store no. 4552 Brattleboro, Vt.
• Store no. 4932 Beaver Dam, Wis.
• Store no. 4933 Fond du Lac, Wis.
• Store no. 4913 Milwaukee, Wis.
Home Depot said in a statement it still intends to build 55 new stores this fiscal year, including 36 new stores in the United States.
As for other stores in the works, the company said it has “determined that it will no longer pursue the opening of approximately 50 U.S. stores that have been in its new store pipeline, in some cases for more than 10 years. Accordingly, the company will record a charge of approximately $400 million related to capitalized development costs and ongoing obligations associated with those future store locations.”
“This is a continuation of our disciplined approach to capital allocation that we outlined last year,” said Frank Blake, Home Depot chairman and CEO, in a statement. “We will invest in our core retail business, in this case our existing stores, which drive our most profitable sales. Our capital efficiency model will also provide improved returns for our shareholders through dividends and share repurchase.”
Home Depot added that investments in existing retail stores will continue to include “maintenance, merchandising resets and other initiatives to improve all elements of the customer’s shopping experience.”
The company reiterated that its total capital spending for the current fiscal year is projected to be approximately $2.3 billion, down from $3.6 billion last year.
Sherwin-Williams earnings fall in the first quarter
Sherwin-Williams saw earnings fall in the first quarter of 2008, but the worldwide paint and coatings giant is still seeing strength in international sales.
Earnings fell 30.3 percent in the first quarter to $77.9 million from $111.8 million in the same period last year. Net sales grew just over 1 percent to $1.78 billion from $1.76 billion in the same period last year.
The stronger net sales were in large part due to strong Global Group sales, as was the case last quarter. Favorable currency rates and eight acquisitions since last year’s first quarter helped aid international sales, according to the paint company.
In the company’s retail Paint Stores Group, net sales were $1.031 billion in the quarter, 1.9 percent lower than in last year’s first quarter. Sales were weak due to “soft architectural paint sales and weak sales in non-paint categories partially offset by improved industrial maintenance product sales.”
Same-store sales decreased 6.5 percent compared with last year, and earnings decreased 31.9 percent. Earnings were weaker because of increased product and freight costs, the company noted.
The company’s Consumer Group, which includes paint products like Dutch Boy, saw sales decrease 4.8 percent in the quarter to $286.9 million. The sales decline was due primarily “to soft DIY demand at most of the segment’s retail customers.” Earnings in the Consumer Group were down 23.7 percent due to higher raw material costs, as well as a lower volume of movement at the company’s distribution centers.
The Global Group’s net sales increased 14.8 percent to $461.9 million due to market share gains, selling price increases, favorable currency translation and acquisitions. Earnings for the Global Group increased 21.7 percent to $7.7 million.
“Paint demand in the domestic new residential, residential repaint, DIY and commercial markets was weaker during the first quarter than we had anticipated at the start of the year,” said Christopher Connor, chairman and CEO of Sherwin-Williams. “We continue to be pleased with the strong sales improvements of the foreign business units in our Global Group and the continued growth they have been achieving in the architectural, industrial maintenance, OEM and automotive finishes product lines.”
Connor also noted that the Paint Stores Group opened 17 new stores in the first quarter and closed 23 “redundant stores.”