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Optimism from the Oracle of Omaha

BY HBSDEALER Staff

A housing recovery will probably begin within a year. So says Warren Buffett, investment icon and CEO of Berkshire Hathaway.


Still, the Omaha, Neb.-based company’s home-construction-related business portfolio has struggled recently. Johns Manville, MiTek Industries, Shaw Floors and Acme Brick combined for pre-tax profits of $362 million in 2010, compared with $1.3 billion in 2006. And during that time, the four brands have shed about 9,400 jobs. 


Still, all four are continuing to invest in significant improvements or acquisitions. For instance: 


• MiTek made five bolt-on acquisitions in the past 11 months;


• Acme Brick spent $50 million to acquire Montgomery, Ala.-based Jenkins Brick & Tile;


• Johns Manville is building in Milan, Ohio, a $55 million plant to make single-ply roofing membrane; and 


• Shaw will spend $200 million in 2011 on domestic plants and equipment. 


“These businesses entered the recession strong and will exit it stronger,” Buffet wrote in his annual letter to shareholders. 


In his widely read missive, the Oracle of Omaha added a characteristic defense of American capitalism. “Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America,” Buffett wrote. “Yet our citizens now live an astonishing six times better than when I was born. The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted.”

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Back at the Big Two: Sales growth

BY Ken Ryan

For the first time since 2005, The Home Depot and Lowe’s Cos. both delivered positive comparable-store sales in all four quarters of 2010. Last year was also the first year both companies showed an increase in full-year sales since 2005. 


These trends are strong evidence that the worst of the economic cycle has passed for the two home improvement retail giants.


Home Depot reported the bigger increase in comp-store sales, a margin that widened in the fourth quarter, as it jumped 3.9%, while Lowe’s increased 1.1%. Among the positive drivers: Customers bought higher-priced goods, like appliances. 


At Atlanta-based Home Depot, the number of transactions worth $900 or more each — about 20% of the company’s sales — rose 10% during the quarter. It was the first time that category had risen in a year, according to Carol Tomé, chief financial officer. Customers responded to Home Depot’s aggressive appliance promotions and took advantage of the energy tax credit that expired at the end of the year, Tomé said. 


Robert Niblock, chairman and CEO of Lowe’s, said during the company’s conference call with analysts that Lowe’s faces pressure from a continuing decline in home values, low consumer confidence and inflationary factors, such as rising fuel prices. “We’re prepared to operate effectively in a slow-growth environment,” he said. “While uncertainty in the market remains, the economic recovery is continuing.”


Sales in Home Depot’s most recent reporting period were driven by the kitchen and bath, paint, flooring and plumbing categories, as well as its international businesses, the company said. Sales in maintenance and do-it-yourself repair categories were robust as were decor-related categories such as ceramic tile, carpet, paint, faucets and bath fixtures.


Mooresville, N.C.-based Lowe’s also had its share of bright spots. Sales of flooring — especially Stainmaster carpet — cabinets and countertops were strong. Company executives took that as a sign consumers were willing to invest in higher-ticket projects even as they caution that consumers are still wary of the economy. 


As the industry waits for a strong housing rebound, Lowe’s is looking to gain market share — a goal it certainly shares with its rivals — and make progress on some of its key initiatives including weekend staffing, increased employee sales training, and greater emphasis on Lowes.com and other Internet programs.


Hope springs eternal


In anticipation of the spring rush — the most important season for home improvement retailers — Lowe’s announced it would hire 50,000 seasonal employees on top of the 8,000 to 10,000 weekend employees the company is bringing on board permanently as part of its recently announced restructuring. To make room for the weekend employees, Lowe’s eliminated about 1,700 middle managers, about one per store, last month. 


Lowe’s said the move allows the company to streamline the in-store management structure and hire the weekend sales associates to staff the stores during the busiest hours. Lowe’s, which employs about 234,000 people, said its percentage of full-time employees would decrease to the 60% to 65% range, down from 70%.


Home Depot, which said it is hiring 60,000 part-timers for its spring season, is stocking up on lawn-care products, gardening equipment, patio furniture, grill and other traditionally strong items to prepare for its busiest season. To augment the push, Home Depot is planning a series of spring sales events across the country, including its Spring Black Friday event. 


Executives from both retailers said they expect to take advantage this spring of the extensive cleanup and repair work related to the harsh winter weather. Most of the work will be to repair or replace roofs, gutters and shrubs damaged by the heavy snow buildup and ice storms from late December through early February.



Pressure to raise prices


As fuel and raw material costs keep rising, vendors have been asking Home Depot and Lowe’s to raise prices. The requests have increased over the last 45 days, executives said. Home Depot said it reviews each request separately. Lowe’s said it would work to keep any retail price increase minimal by working with vendors and looking for areas to be more efficient.


“We’re working with our suppliers to try and mitigate the pressure they are seeing with raw material price increases so we can hold the line the best we can,” said Craig Menear, executive VP merchandising, Home Depot. 


Lowe’s, like others, said it is increasing prices as rising commodity prices push up the costs of some products, including electrical, plumbing, lumber and millwork.


The look ahead


Home Depot is counting on in-home projects like bathroom remodeling and new products like lithium battery-powered tools and paint to help drive sales throughout 2011. Specifically, Home Depot is rolling out a new line of Milwaukee Red Lithium tools. “These tools deliver 40% longer run time and 20% more torque than products powered by current lithium technology, in addition to providing superior performance in cold weather conditions,” Menear said.


Home Depot CEO Frank Blake told analysts that the overall picture “is one of a stabilizing business.” Blake termed that a “source of some confidence entering 2011 because it is occurring despite the continued weakness of the housing markets.”


Indeed, new data show the housing market is still hurting. The National Association of Realtors recently reported that the rising number of distressed sales pushed home prices down to their lowest level in almost nine years. 


In his remarks to analysts, Blake said the housing industry remained under duress, with mortgage defaults continuing to increase and unemployment remaining high. Niblock said the industry was still dealing with what he called “the psychological impact of consumers wondering when home prices will finally bottom.”


The struggling builder market hurt Home Depot’s professional business, although the rate of decline was not as severe as in previous months, the company said. As well, Lowe’s said sales to its commercial business customers were soft.


A digital focus


Lowe’s said it is putting increased emphasis on social media and Lowes.com. The company said its online conversion rate increased 32% in the fourth quarter. Lowe’s said its Facebook page has more than 500,000 fans and that the company launched a mobile site in December that garnered more than 1 million visits in the first month. “We’re reaching a key customer segment through online media, which allows us to better monitor and influence sentiment,” Niblock said.


Home Depot hailed the advances of its in-store technology, including its F.I.R.S.T. Phone, which gives associates real-time data on sales, gross margin and inventory. (The name is an acronym for find, inquire, respond, solve and thank.) The device also simplifies the in-stock process. “One thing that’s been a pleasant surprise is checkout,” said Marvin Ellison, executive VP of Home Depot’s U.S. stores. “We had almost 1 million transactions in the fourth quarter on the F.I.R.S.T. Phone in checking customers out at point-of-sale. So a mobile point-of-sale checkout is big for us because we have a huge focus this year on speed of checkout.”


In 2011, Home Depot plans to open 10 stores, two in the United States, one in Canada and seven in Mexico. Lowe’s plans to open 25 to 30 new stores, compared with 42 last year. Niblock said the standard prototype Lowe’s is building today is 103,000 sq. ft., down from 117,000 sq. ft. previously. 

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Hardware stores tackle tough topic: Healthcare reform

BY By Ken Clark

Orlando, Fla. — A funny thing happened on the day of a healthcare reform seminar. 


A Florida judge ruled that the reform itself is unconstitutional. There you have it: another wrinkle in the already extremely complicated healthcare debate. 


The seminar at the True Value Co. Spring Market was designed to help hardware store owners better understand the impact of a massive reengineering of the nation’s healthcare system. The breaking news didn’t stop the presenters from high-powered consulting firm Towers Watson from breaking down the building blocks of healthcare reform in its presentation, “How Health Care Reform Will Affect Your Business.” And they didn’t seem too worried about the judge’s ruling. 


Regina Ihrke, consultant with Towers Watson, requested that the audience of about 30 True Value members here at the co-op’s Spring Market feel free to participate and ask questions. There was no need for the encouragement. The questions began to fly at the PowerPoint’s innocuous first slide.


Some of the specific queries from the audience simply didn’t have an easy answer. For instance:


• In order to figure out a company’s number of employees, how does one count part-timers? This is an important point for companies at or near the 50-employee level.


• How does an employer determine family income? This is another crucial consideration because employees must be offered “affordable” insurance, defined as 9.5% of family income.


On both counts, more guidance is expected, Ihrke said.


Big changes 


Health Care Reform is the all-encompassing phrase for the combination of the Patient Protection and Affordable Care Act (PPACA), enacted March 23, 2010; and the Health Care and Education Reconciliation Act (HCERA), enacted a few days later.


“Health Care Reform is the most significant change in employee benefits, access to health care and affordability, since Medicare began in the 1960s,” said Ihrke, of Towers Watson, the firm whose clients include McDonalds as well as True Value.


One of the critical new phrases introduced by the legislation is “pay or play.” Ihrke explained that companies with 50 or more employees will have a choice: offer affordable healthcare coverage (play), or face a $2,000 per employee fine (pay) and turn employees over to yet-to-be-created Health Benefit Exchanges for coverage.


The Health Benefit Exchanges become operational in 2014.


The short-term challenges, according to Ihrke, are understanding the new law and its implications and implementing immediate provisions. In the long term, the challenge is to manage compensation and benefit programs in the new environment. 


For Phil Jarriel of Handy Andy with five locations in Georgia and about 85 employees, planning for the impact is exasperating. 


“The rules haven’t been set, we don’t know what the guidelines are; we don’t know what the parameters are,” he said. “You try to follow the guidelines they have set and navigate as best you can.”


From a pure, expense-control perspective, there seems to be incentive to push employees over to the Health Benefit Exchanges, Jarriel said. “But, hey, guess what? The insurance pools aren’t mandated and aren’t in place. So that may not be an option.”


Indeed, the question of whether to pay or play will loom large for businesses, according to Ihrke. One factor is the age of the work force. “Every employer is different,” she said. “And at the age of 50 and the age of 40, the cost levels for an employee are very different.”


A key feature of the reform — and the feature that bothered the judge in Florida — is the individual health coverage mandate. This means all individuals are required to enroll in basic health coverage or pay a penalty of $700 a year. This mandate also begins in 2014, but just how this will be tracked and enforced is unclear, Ihrke said. The idea is that massive participation in insurance pools will lower costs.


But many remain skeptical. “We would definitely call this ‘healthcare insurance reform,’ not healthcare cost reform,” Ihrke said. e

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