Presented by: ARE SUNNY SKIES AHEAD FOR THE 2013 HOME IMPROVEMENT SEASON? Laura Kennedy Senior Analyst Doug Hermanson Economist June 7, 2013 Home Improvement Webinar Series

© Copyright 2013 Kantar Retail Agenda Macroeconomic Outlook: Government Tax and Spend Effects from the Certain to the Possible –Payroll tax and the sequester –Entitlement cuts Kantar Retail ShopperScape®: How Shoppers Are Approaching the Spring Home Improvement Season Project Intentions Where Theyll Shop, and Why How Theyll Plan 2

© Copyright 2013 Kantar Retail Payroll Taxes and The Sequester Discretionary home and softgoods categories Nondiscretionary products with a stronger value proposition may benefit Regional markets with little to offset negative impact Haves and Have Nots in different ways 3 Uncertainty may be the biggest threat to growth Payroll Tax Increase and Sequester Budget Cuts: Relative to Income Gains 2013 Full-Year Impact in Billions of Dollars * Estimated assuming 2.5% to 3.0% income growth based on job growth of 1% to 1.5% Source: U.S. Department of Commerce and Kantar Retail Who is affected?

© Copyright 2013 Kantar Retail 4 $25,000$50,000$100,000Salary -$500-$1,000-$2,000Salary reduction from the payroll tax increase Payroll Tax: Facts Payroll tax was lowered two percentage points in 2011 as a temporary stimulus measure Payroll tax brought back to its previous rate on January 1, 2013 Payroll Tax: Facts Payroll tax was lowered two percentage points in 2011 as a temporary stimulus measure Payroll tax brought back to its previous rate on January 1, 2013

© Copyright 2013 Kantar Retail 5 *Read as: 66% of home improvement shoppers said they have noticed a difference in their take-home pay since the payroll tax increase. No significant differences compared with all shoppers at the 95% confidence level All shoppers n = 2514; Home Improvement n = 1106; Hardware Store n = 333 Source: Kantar Retail ShopperScape ®, February 2013 Two-thirds of Home Improvement Shoppers Have Noticed Lower Take-Home Pay as a Result of the Payroll Tax Rate Increase

© Copyright 2013 Kantar Retail Shading indicate significantly greater percentage compared with all shoppers; border indicates significantly lower percentage (95% confidence level). Behaviors apply to all shopping, not necessarily home improvement 6 Source: Kantar Retail ShopperScape ®, February 2013 Significantly more likely than all shoppers to postpone HI projects, as well as shop at Walmart Some Shoppers Indicate They Will Postpone HI Projects as a Way to Cope with Tax Increase Affect of Payroll Tax Increase on Shopping, Spending Behavior (among past-4 week shoppers who receive a paycheck, e.g., not retired or unemployed) Note: changing behavior is in the minority

© Copyright 2013 Kantar Retail Arrows indicate significant difference between column percentages (95% confidence level). Behaviors apply to all shopping, not necessarily home improvement. Have and Have Not distinctions are based on income levels of respondents. Haves n = 406; Have-nots n = 259 Have-Not and Haves Indicate Similar Behavior Toward Home Improvement Spending 7 Source: Kantar Retail ShopperScape ®, February 2013

© Copyright 2013 Kantar Retail What is it? Triggered by the inability of congress to reach a budget deal that cuts long-term spending Short term: 85 billion dollars of U.S. government cuts from March 1, 2013 to September 30, Long-term: 1.1 trillion dollars in U.S. government spending cuts through What is it? Triggered by the inability of congress to reach a budget deal that cuts long-term spending Short term: 85 billion dollars of U.S. government cuts from March 1, 2013 to September 30, Long-term: 1.1 trillion dollars in U.S. government spending cuts through The Sequester: The Facts Source: Pew Research Center, U.S. Congressional Budget Office, and Kantar Retail 8 What programs are affected? Directly: Half the cuts are from discretionary military spending and the other half are from discretionary non-defense spending Indirectly: To a lesser degree funding for education and private-sector manufacturing Does not affect mandatory programs such Medicaid, Social Security and SNAP, but more on that later…….. What programs are affected? Directly: Half the cuts are from discretionary military spending and the other half are from discretionary non-defense spending Indirectly: To a lesser degree funding for education and private-sector manufacturing Does not affect mandatory programs such Medicaid, Social Security and SNAP, but more on that later…….. What is the affect on retail?

© Copyright 2013 Kantar Retail 1/6 have government jobs; much smaller number of jobs affected indirectly 9 To what extent are you concerned that government budget cuts known as 'the sequester 'may negatively impact the job security of employed members of your household? Source: Kantar Retail ShopperScape ®, April 2013 Threat: More are Concerned Than Ought to Be Home Improvement and Hardware Shoppers

© Copyright 2013 Kantar Retail Those that are concerned are significantly more likely to spend less 10 To what extent are you concerned that government budget cuts known as 'the sequester 'may negatively impact the job security of employed members of your household? Source: Kantar Retail ShopperScape ®, April 2013 Threat: More are Concerned Than Ought to Be Home Improvement and Hardware Shoppers

© Copyright 2013 Kantar Retail The Sequesterand Other Regional Effects 11 The growth threats are often focused, if not offset *Ranging from about 1 of every 3 jobs in Washington D.C. to about 1 of every 5 jobs in Virginia. Source: Kantar Retail analysis Washington D.C. Wyoming Alaska New Mexico Mississippi Oklahoma Hawaii West Virginia Montana Alabama Maryland Virginia Vulnerable States With Highest Share of Government Jobs* Other Vulnerable States Most vulnerable are these states where recovery has lagged the most Most vulnerable are these states where recovery has lagged the most Maine Missouri Nevada Rhode Island

© Copyright 2013 Kantar Retail Hawaii CT Rising Home Prices as Key Recovery Indicator 12 They create job and wealth gains that vary across states Home prices in 10 states back up above pre- recession peak More states seeing sizeable jump in home prices from recession low. States by Home Prices Source: U.S. Bureau of Labor Statistics, Federal Housing Finance Agency, and Kantar Retail *Measures current home prices (through Q1 2013) relative to pre-recession peak Home Prices vs. Pre-Recession Peak* 50%14%16%13%8%13%22%17%10%30%22%13%9%10%13%0% Alaska At or above pre-recession peak Down less than 10% from peak Down 10 to 24% from peak Down more than 25% from peak Prices up 8.0% or more from low Home prices remain near low Home Prices vs. Recession Low Point** **Measures current home prices (through Q1 2013) relative to recession low point D.C 24%9%10%11%

© Copyright 2013 Kantar Retail Financial Health of Home Improvement Shoppers is Holding Up Source: Kantar Retail ShopperScape ®, April 2012, March 2013 & April 2013 Feelings about investments, home values have improved significantly from last from the same time last year Scant signs that shoppers are feeling worse off about incomes and job security in the wake of government tax and spend effects

© Copyright 2013 Kantar Retail Job Growth: Holding up in Strong Q1 followed by moderate April gains Source: U.S. Department of Labor and Kantar Retail Monthly U.S. Job Growth Average Month-to-Month Change in Jobs in Thousands Unemployment rate trends suggest Have Not job gains have picked up in recent months construction and retail Economy added another 175,000 jobs in May Pre- Recession Trend

© Copyright 2013 Kantar Retail Suggests uncertainty having greater effect on Haves spending plans 15 Haves* (annual HH income $60k+) Have Nots (annual HH income <$60k) All Home Improvement Shoppers Have & Have Nots: Percent of Home ImprovementShoppers Planning to Spend About the Same or More (three-month moving average) Source: Kantar Retail ShopperScape ®, January 2009–April 2013 *Read as: 75% of upper-income home improvement/hardware store shoppers surveyed in April 2013 indicated plans to spend about the same or more at retail in the coming month. Note: Refers to spending at retail in general, not necessarily at home improvement and hardware store retailers Have Households Gaining after Leading Falloff; Have Nots More Resilient, but Leveling Off

© Copyright 2013 Kantar Retail 16 Even planned budget cuts (i.e., sequester) will mean persisting deficits, elevated debt levels Points to need for additional measures to put government on a sustainable path U.S. Government Debt and Budget Deficit* As Share of Gross Domestic Product Source: U.S. Congressional Budget Office and Kantar Retail U.S. Government Spending: The Problem Persisting budget deficits and accumulating debt 1997– – s 2002– – –2020F Deficit worsened past 4 years, hitting bottom at -10% of GDP in 2009 Accumulated government debt is projected to stay elevated through 2020 *Projections through 2020 include sequester budget cuts triggered on March 1, unless Congress approves alternative budget plan After 2020, projected to worsen again toward 4% deficits

© Copyright 2013 Kantar Retail 17 Under current CBO projections, these programs will approach 2/3 of all government spending after 2020 Will mean reversal of government spending priorities of 40 years ago Share of Government Spending: Entitlement & Other Mandatory Programs Source: U.S. Congressional Budget Office and Kantar Retail Ultimate Targets: Entitlement Programs Social Security, Medicare, health care spending, etc. …

© Copyright 2013 Kantar Retail 18 A serious effort to control spending would mean unpopular choices: –New constraints on Social Security eligibility and benefits? –Active restraint of health care costs via Medicare, Medicaid, health care exchanges? Share of Government Spending: Entitlement & Other Mandatory Programs Source: U.S. Congressional Budget Office and Kantar Retail Biggest Drivers: Social Security & Medicare Health care reform programs will add to entitlement growth Social Security & Medicare Medicaid & Health Care Reform Programs Income programs including SNAP Other programs (e.g., for Federal Workers, Military, Veterans, etc.)

© Copyright 2013 Kantar Retail Government Cuts Will Hit Have Nots Hardest 19 Their share of income is falling even with government aid 60% households 40% of households Have Nots Haves Falling Share of All Income Sources Rising Share of All Income Sources ~25% income < $62,000 Per Year ~75% of income > $62,000 Per Year Household Income Paycheck $ Source: U.S. Department of Commerce, Congressional Budget Office, and Kantar Retail analysis

© Copyright 2013 Kantar Retail Government Aid = About 1/3 of Have Not Income 20 Grown significantly in 40 years, especially last few years 60% households 40% of households Have Nots Haves ~25% income < $62,000 Per Year ~75% of income > $62,000 Per Year Household Income Paycheck $ Source: U.S. Department of Commerce, and Kantar Retail analysis 3%97%8%92% Government Entitlement, Assistance Programs 20% 80% 35% 65% Growing Reliance on Government Falling Share of All Income Sources

© Copyright 2013 Kantar Retail Key Takeaways: Macroeconomic Outlook Payroll tax increase may dampen or delay, but not derail most purchases Uncertainty is the biggest threat from the Sequester If there is a noticeable impact from the Sequester it will be regional, especially among states lagging the recovery Haves spending plans are more affected by budget uncertainty Have Nots are more focused on month-to-month job gains/losses In the long-term, spending of boomers and lower-income households possibly hurt by future cuts to entitlements Source: Kantar Retail analysis 21

© Copyright 2013 Kantar Retail Agenda Macroeconomic Outlook: Government Tax and Spend Effects from the Certain to the Possible –Payroll tax and the sequester –Entitlement cuts Kantar Retail ShopperScape®: How Shoppers Are Approaching the Spring Home Improvement Season Project intentions Where theyll shop How theyll plan How retailers are reacting 22

© Copyright 2013 Kantar Retail Source: Kantar Retail ShopperScape®, April Lowes shoppers are past-four-week Lowes shoppers; significant differences are at a 95% confidence level Home Improvement Shoppers More Likely to Have Long-Term Relationships with Homes Shoppers Descriptions of Their Relationships with Their Homes or Where They Live (among all shoppers) 51% of home improvement shoppers; Gen Y, Gen X, and Have Nots less likely Gen Y, Gen X making new-household changes Home improvement/hardware store shoppers more likely HI shoppers less likely; Gen Y, Gen X, and Have Nots more likely 47% of home improvement shoppers

© Copyright 2013 Kantar Retail Only Slightly Higher Project Intentions in 2013 Is government uncertainty further delaying spending? Source: Kantar Retail ShopperScape®, April This year, Gen X and Have shoppers (incomes $60K+) are more likely than all shoppers to plan projects Last year the warm winter resulted in shoppers spending before traditional spring months

© Copyright 2013 Kantar Retail But Men Could Drive Spending Significantly more men than women plan projects, and higher shares of men plan projects than in 2012 Source: Kantar Retail ShopperScape®, April Likelihood of Initiating a Home Improvement Project in the Next Six Months (Among all shoppers) Bolded and underlined percentages are significantly greater than female and 2012 percentages at a 95% confidence

© Copyright 2013 Kantar Retail Outdoor Project Plans Still Rank Highest Significantly fewer shoppers plan large-ticket projects like a new kitchen or roof Source: Kantar Retail ShopperScape®, April Bolded and underlined percentages are significantly greater than 2012 percentages at a 95% confidence

© Copyright 2013 Kantar Retail Still, Shoppers Are Gradually Shifting Away from the Cheapest Projects Source: Kantar Retail ShopperScape®, April Bolded and underlined percentages are significantly greater than 2011 percentages at a 95% confidence

© Copyright 2013 Kantar Retail A Discretionary Spending Option: Retailers Push Outdoor Entertaining Source: Kantar Retail store visits, Lowes circular 28

© Copyright 2013 Kantar Retail But Price Remains a Focus Source: Kantar Retail store visits 29 It does take a while depending on the traffic hitting that category for the customer to encounter those values, to encounter the new ranges and market assorting impacts. –Greg Bridgeford, Lowes Chief Customer officer

© Copyright 2013 Kantar Retail Remember the Options: Value Discounters Offer Convenience, Price, Low Commitment 30 Source: Kantar Retail store visits What are HI retailers comparative value propositions, price justifications? At the same time, THD and Lowes sell more cheap toolsets…

© Copyright 2013 Kantar Retail Shoppers Consider Home Depot the Price Leader Home Depot viewed as the price leader versus Lowes Source: Kantar Retail ShopperScape®, April Retailer Viewed as Price Leader for Home Improvement Products (among shoppers who purchase home improvement products) Significantly greater shares of home improvement purchasers name Home Depot as the price leader vs. Lowes Gen Y and Gen X overindex on Amazon as the price leader Haves shoppers are also more likely than all shoppers to see HD as price leader Lowes shoppers are past-four-week shoppers. Underlined and bold percentage is significantly greater than percentage of home improvement shoppers who believe Lowes is the price leader, at 95% confidence

© Copyright 2013 Kantar Retail Up-Market Shoppers More Likely to Use Credit for Upcoming Projects All Shoppers Have-nots (< $60,000) Haves ($60,000+) Pay up front with cash/debit/check65%66%63% Credit card not affiliated with a retailer15%12%18% Retailer credit card (e.g., Lowe's or Home Depot credit card)9%8%10% Use retailer's financing offer (e.g., delay payments, no interest until 2014, etc.)5%4%6% Finance project through a contractor3%2%4% Get a home equity loan3%2%3% Get a loan from a bank/financial institution that is NOT a home equity loan2% 3% Get a loan from a family member/friend2% 1% Don't know10%12%8% Prefer not to answer2%3%1% Credit availability still hampering lower-income shoppers Source: Kantar Retail ShopperScape®, April Bolded and underlined percentages are significantly greater than all shoppers at a 95% confidence; outlined percentages are significantly lower

© Copyright 2013 Kantar Retail Meanwhile, Shoppers Are More Willing to Pay Others to Do the WorkBut Is It Plateauing? Source: Kantar Retail ShopperScape®, April Approaches to Their Next Home Improvement Project Among shoppers who are likely to initiate a project in the next six months

© Copyright 2013 Kantar Retail Gen Y Still Views Retailers as a Trusted Source for Home Improvement 34 Approaches to Their Next Home Improvement Project Among shoppers who are likely to initiate a project in the next six months Source: Kantar Retail ShopperScape®, April 2013 Bolded and underlined percentages are significantly greater than all shoppers at a 95% confidence

© Copyright 2013 Kantar Retail Ikea: A New Model for Home Improvement? 35 Source: Kantar Retail store visits Plus: cheap tools Installation services Appliances et al. Ikea-branded

© Copyright 2013 Kantar Retail More Variety: More Consumers Plan to Shop Lawn and Garden Retailers This Year Source: Kantar Retail ShopperScape®, April % 55.4% Where Shoppers Are Likely to Shop for Materials for Their Next Home Improvement Project (Among shoppers planning a project and planning to buy their own materials) Boomers and Haves (incomes $60,000+) more likely to shop Home Depot Bolded and underlined percentages are significantly greater than 2012 at a 95% confidence

© Copyright 2013 Kantar Retail Gen Y Is More Likely to Shop Online and at Smaller Boxes; Less Likely at HD or LOW Source: Kantar Retail ShopperScape®, April % 55.4% Where Shoppers Are Likely to Shop for Materials for Their Next Home Improvement Project (Among shoppers planning a project and planning to buy their own materials) Bolded and underlined percentages are significantly greater than 2012 at a 95% confidence

© Copyright 2013 Kantar Retail Have Nots More Likely to Shop Ace, True Value, and Hardware Stores Source: Kantar Retail ShopperScape®, April % 55.4% Where Shoppers Are Likely to Shop for Materials for Their Next Home Improvement Project (Among shoppers planning a project and planning to buy their own materials) Bolded and underlined percentages are significantly greater than 2012 at a 95% confidence

© Copyright 2013 Kantar Retail Big-Box Garden Centers Feature More Solutions, GuidanceTargeting the Specialists? Source: Kantar Retail store visits 39 Mostly branded displays…but some retailer guidance Gardening kits cater to novices as well as smaller residences

© Copyright 2013 Kantar Retail Traditional and Digital Means of Trip Preparation Both Increase in Source: Kantar Retail ShopperScape®, April 2013 Methods of Preparation Before a Trip to a Home Improvement Retailer (All or most of the time, among home improvement store and hardware store shoppers) Methods of Preparation Before a Trip to a Home Improvement Retailer (All or most of the time, among home improvement store and hardware store shoppers) Bolded and underlined percentages are significantly greater than 2012 at a 95% confidence

© Copyright 2013 Kantar Retail Gen Y, Gen X Far More Likely to Use Digital Tools 41 Source: Kantar Retail ShopperScape®, April 2013 Methods of Preparation Before a Trip to a Home Improvement Retailer (All or most of the time, among home improvement store and hardware store shoppers) Methods of Preparation Before a Trip to a Home Improvement Retailer (All or most of the time, among home improvement store and hardware store shoppers)

© Copyright 2013 Kantar Retail Digital Integration In-Store Is Still Slow… Lowes focuses on QR codes and MS codes, especially in garden Source: Kantar Retail store visits 42

© Copyright 2013 Kantar Retail 43 Home Depot Makes the Big Box Smaller with Mobile Store Maps and Item Locator Source: Home Depots iPhone app

© Copyright 2013 Kantar Retail Lowes Reaches Out with Weekly Localized and Personalized Spring Tip s Source: Home Depot circular, Lowes s, Kantar Retail research and analysis 44 Also features spring video series Tailors projects to type of home, locationthough weather doesnt always coincide with project suggestion

© Copyright 2013 Kantar Retail Key Takeaways: Spring Projects 2013 The strengthened housing market isnt enough. Gen X and upper-incomers are more likely to start projects soon, but by and large shoppers remain conservative with their home improvement project plans. Brands can help shoppers stretch their budgets. Retailers and shoppers are prioritizing solutions and guidance as value-adds in a tight environment. Find a place in a low-cost discretionary solution to help drive sales and baskets. The balance between value and price will be crucial. Even as shoppers remain thoughtful about their home improvement spending, retailers that can provide something extraincluding better digital toolswill drive traffic and bigger tickets. Source: Kantar Retail analysis 45

© Copyright 2013 Kantar Retail 501 Boylston Street Suite 6101 Boston, MA F Two Easton Oval Suite 500 Columbus, Ohio F Laura Kennedy Senior Analyst T Doug Hermanson Economist T