NEW HOME CONSTRUCTION DROPS AGAIN WITH SLOW START IN 2016 – WILL HOME DEPOT EARNINGS BE AFFECTED?

Showing the lowest rate since October, new housing starts fell 3.8% in January from a month earlier. U.S. home builders are reporting a positive outlook as spring approaches, citing solid fundamentals for housing demand, such as job gains and low mortgage rates. Demand for housing has been strong over the past year but growth has been slow, with housing starts just 1.8% higher than January 2015.

Home builders are reporting shortages of land and labor, leading to project delays and higher construction prices, which lowers demand for new homes. However, new home sales in December were up 9.9% from a year earlier. “The weak showing in construction activity is broadly consistent with the recent souring in home builders’ sentiment, and when combined with the downdrift in permit approvals it suggests some slowdown in the months ahead,” said Millan Mulraine, economist at TD Securities USA, in a note to clients.

The Home Depot performed very well in 2015, giving investors better returns than competitor Lowe’s. The Home Depot opened 2016 with a large pullback due to fears about the general economy and the housing market in particular. An anticipated rise in mortgage rates has not happened and Home Depot is gearing up for spring, its busiest period of the year. The company will hire more than 80,000 workers for its 2,000 stores and 75 distribution facilities. The Home Depot’s domestic business has kept it in the lead, but with Lowe’s announcement of its acquisition of Canadian home-improvement chain Rona, international expansion could be important to future growth.

Source: WSJ

Game Changer for the Home Improvement Market?

by Chad Symens

Lowe’s acquisition of Rona could be game changer for the home improvement market. Home Depot has 2,273 stores with 182 located in Canada. Before the Rona acquisition, Lowes had 1,840 stores including Orchard Supply stores. The Rona acquisition will add 496 stores to Lowe’s portfolio which means that once it's finalized, Lowe’s will have 2,336 stores compared to Home Depot’s 2,273.

Nearly half (238) of the Rona stores are in Quebec which represents nearly 25% of the entire Canadian home improvement market; a market where Lowe’s does not currently operate any stores. The Canadian home improvement market is estimated at over C$45 billion and is forecasted to grow at a CAGR of 3.9% from 2014 to 2018.  Lowe’s will be very well positioned to capture an oversized share of the growth compared to Home Depot with their 182 Canadian stores. In 2015, Home Depot acquired Interline Brands as a strategy to expand the pro division sales.  It will be interesting to see which strategy – investing in the pro business versus acquiring more physical store space - will turn out to be the better strategy.

Lowes to Acquire Canadian Chain Rona

On Wednesday, home improvement retailer Lowe’s made a $2.3 billion bid for Quebec-based home-improvement chain Rona. The deal comes 4 years after an attempted hostile acquisition that faced opposition from major political parties. Initial indications point to a friendly deal this time around with approval from the Rona board of directors.

“One of the big differences between this and last time is obviously this time we have the unanimous approval and support of the board of directors of Rona as well as the management team” said Robert A. Niblock, Lowe’s chairman, president and chief executive. “We’re in a much better place than we were in 2012.”

Under the terms of the deal Lowes is expected to acquire all of the issued and outstanding common shares of Rona for C$24 per share in cash, and all of the issued and outstanding preferred shares of RONA for C$20 per share in cash. The total transaction value is C$3.2 billion (2.3 billion in US dollars).

"We believe the time is right to take the next step in the evolution of the RONA family. The team at Lowe’s has presented us with an excellent plan that enables our company to maintain its brand power while at the same time leveraging Lowe’s global presence to build upon and expand our reach. With commitments made by Lowe’s to our employees, potential new markets for Canadian manufacturers and product offerings for our independent dealers, this transaction presents the ideal opportunity for the continued growth of our company while delivering an attractive premium for our shareholders,” said RONA’s Chairman, Robert Chevrier.

Lowe’s has identified over C$1 billion of opportunities to further increase revenue and operating profitability in Canada. These include: expanding customer reach and serving a new portion of the market by applying Lowe’s expertise in certain product categories, such as appliances; enhancing customer relevance, utilizing Lowe’s strengths as a leading omni-channel home improvement company and drawing on its customer experience design capabilities; and driving increased profitability in Canada by leveraging shared supplier relationships and enhanced scale, as well as Lowe’s private label capabilities, in addition to eliminating RONA’s public company costs. Given these opportunities, Lowe’s believes there is potential to double operating profitability in Canada over five years.

"The transaction is expected to accelerate Lowe’s growth strategy by significantly expanding our presence in the Canadian market through the addition of RONA’s attractive business and excellent store locations across the country," added Niblock.  "Importantly, the transaction also provides Lowe’s with entry into Quebec, where RONA is the market leader and we have no presence.