Home improvement drives sales; toys still no fun

DSN Retailing Today, July 11, 2005 by Mike Duff

Strong sales in most hard-lines categories, led by large gains in the home improvement market, buoyed up this retailing segment last year for both broadliners and specialists with the sole exception of toys, a category that continued its pattern of sales decline.

While consumers weren't spending as much on toys, they did shell out more money for discretionary items such as sports apparel, automotive accessories, tools and paint. In home improvement, all do-it-yourself categories experienced growth while the sporting goods sector reversed last year's flat sales to show its strongest improvement since 1997.

Hardware categories were standout performers once again, with most of the spoils enjoyed by specialists The Home Depot, Lowe's and Menards. But mass retailers including Wal-Mart, Sears. Target and Costco also benefited from the public's fix-up fascination, reporting strong growth in categories such as outdoor living, power tools and paint.

Except for Sears, sales gains for the top five home improvement volume retailers were all up by double digits, with the largest gain reported by Lowe's at nearly 18%. In Sears' case, while tools and outdoor power equipment were strong segments, weaker hardware categories had been scaled back in recent years, impacting sales. In addition. Kmart's ongoing sales declines affected total home improvement revenue for the new Sears.

Revenue growth for the home centers came from both store expansion and comparable-store sales gains. Meanwhile, the specialists continue to test new formats, territories and services to grow their share of the larger worldwide home improvement retailing market. Experimentation with urban formats was one trend this past year, with Home Depot opening stores in Manhattan with unique assortments targeting specific neighborhoods and Menards opening its first two-level urban format store in St. Paul, Minn.

In automotives, a modest growth rate of 5.2% in do-it-yourself categories and tires followed a predictable pattern. A growing pool of older vehicles is starting to benefit retailers, with these cars requiring more maintenance after seven years. Sales performance of the specialists was inconsistent, however, with CSK Automotive reporting a decline and gains ranging from 3.3% at AutoZone to nearly 14% for O'Reilly Automotive.

Hot trends in automotives this past year related mainly to growth of impulse discretionary categories such as performance parts, truck accessories and products for vehicle personalization. Many of the specialists were successful at expanding beyond the traditional auto categories this past year by testing new product segments such as scooters, workshop tools and vehicle entertainment products such as on-board DVD players.

Toys, meanwhile, stayed mired in a prolonged slump in 2004. with sales falling 3% to $20.1 billion compared to $20.7 billion in 2003. And while everyone has been hoping for a rebound, industry experts aren't expecting much of a bounce in 2005.

"I wish I could say that sales will improve this year but it doesn't look that way so far." said Reyne Rice. toy trend specialist for the Toy Industry Association. "But action figures based on movies should drive sales during the summer and there are other categories that should be strong this fall."

Retailers are optimistic that sales of "Star Wars" toys will generate improved second-quarter sales that will carry through the summer and into the fall. By then, Rice said retailers can expect a flood of strong product in several categories, including preschool electronic toys, special-feature plush dolls and role-play games and toys.

On the retail side, Wal-Mart retained its runaway lead with about 25% of the market followed by Toys "R" Us and Target. Toys "R" Us will probably drop into the No. 3 position after it closes some of its 680 U.S. toy stores following its $6.6 billion sale to a group of investors led by Kohlberg, Kravis, Roberts & Co., a deal that should be complete by August.

"Toys "R" Us and Target could switch positions by this time next year, depending on how many stores Toys "R" Us closes," said Sean McGowan, an analyst with Harris Nesbitt. Nobody is sure at this point how many under-performing stores will be dosed but the estimates have ranged from 50 to 150.

The top five is rounded out by Kmart with about 5% of the market and KB Toys with about 2%. KB now has only 650 stores--half the number it had when it filed for bankruptcy in January 2004--and faces an uncertain future as it plans to emerge from bankruptcy before the holidays.

Exclusives remain a strong trend at retail, with the Big Three retailers vying for exclusive rights to new product, but sharp price cuts seem to be a thing of past. Both Wal-Mart and Target have shown little interest in repeating their 2003 holiday season price war that drove sales but hurt margins.

As opposed to the dismal toy sector, sporting goods enjoyed a revival. Flat for several years, wholesale sales to retailers grew 3.98%, the largest gain for this segment since 1997, according to Sporting Goods Manufacturers Association International, a trade association for the industry.