Presented by: Laura Kennedy, Principal Analyst Doug Hermanson, Senior Economist Home Improvement Webinar Series January 24, 2014 BOOSTING SHARE IN A “SAMERS” WORLD Ahead for Home Improvement in 2014

© Copyright 2014 Kantar Retail Agenda Home Improvement Macro Update for 2014 The Shopper in 2014: Defining the “Samers” and What They Mean for Home Improvement Retail 2

© Copyright 2014 Kantar Retail 2013 Housing Metrics 3 Housing Recovery Solidified in 2013 Source: U.S. Department of Commerce, Case Schiller, National Board of Realtors and Kantar Retail 2013 Housing Metrics Year-to-Year % Growth Home price inflation boosts shopper confidence Strong growth in home sales Housing starts post +15% growth Trends in these metrics shaped partly by sharp decline in home foreclosures Home Sales Home Prices Single Family Housing Starts

© Copyright 2014 Kantar Retail Home Improvement Sales Results Acceleration across most home improvement channels One exception is hardware stores which fell off sharply Home centers benefited from shopper focus on big-ticket projects and appliances Inflation boosted specialty channel growth Home Improvement Sales Growth % Change Yr-to-Yr, Not Seasonally Adjusted Source: U.S. Department of Commerce and Kantar Retail ** Fourth quarter is estimated

© Copyright 2014 Kantar Retail Pre- Recession Trend 5 Result of turning calendar on Social Security payroll tax hike Improving job gains will also bolster income gains in 2014 Meanwhile, sequester impact less than feared in 2013 and averted for 2014 by budget deal Growth Rate of After-Tax Household Income Not Adjusted for Inflation Source: U.S. Department of Commerce, U.S. Congressional Budget Office and Kantar Retail Income Boost Looms in 2014 After-tax income growth will revert toward before-tax pace Net Income Growth Likely Sequester impact End of Social Security payroll tax cut

© Copyright 2014 Kantar Retail Job Gains Improving—Despite Weak December 6 Should be sustained by investment-related trends Source: U.S. Department of Labor and Kantar Retail Monthly U.S. Job Growth Average Month-to-Month Change in Jobs in Thousands Except for December blip, trend in 2013 eclipsed pre- recession job pace Temporary factors likely hurt December, (e.g. shifts in health care jobs) Positive trends in jobless claims and investment will sustain job gains Pre- Recession Trend

© Copyright 2014 Kantar Retail Subsiding Government Effects in Fiscal cliff to sequester. Contributed to weak first quarter Source: Calendar by digitalart, photos.com, Kantar Retail analysis New budget deal. Relieves threat of a government shutdown and eases Sequester cuts at least for the fiscal 2014 year. Potential Fed tapering. Debate triggers market volatility and slip in spending plans Standoff: budget debates, government shutdown, ACA. Oct 1 – October 16 String of government issues hurt 2013 spending plans

© Copyright 2014 Kantar Retail More Households Plan to Spend Similar vs An improvement or deterioration depending on perspective Home Improvement Shoppers’ Spending Intentions Percent of Shoppers Planning to Spend in the Coming Month Home improvement households moving toward spending about the same as a year ago at all retailers Suggests strong growth in homegoods partly at the expense of other categories Shift is from fewer Have Not households cutting back and fewer Have households planning to spend more Source: Kantar Retail ShopperScape® Plans to spend about the same Plans to spend less Plans to spend more Represents sum of percentage of primary household home improvement and hardware store shoppers planning to spend in the coming month at all retail, not just home improvement

© Copyright 2014 Kantar Retail Benefiting most from rebound in wealth—home prices and stock market More savings and home equity in previous home to make new home purchase Delaying household formation as job and income gains lag First-time home buyers squeezed more by decrease in home affordability Hurt most by tighter FHA lending standards in Gen Y Boomers and Seniors 2014

© Copyright 2014 Kantar Retail Varying Priorities by Generation Help Further Refine Opportunities 10 Source: Kantar Retail ShopperScape ®, October 2013 Top 5 Spending Priorities by Generation (as ranked by percentage of shoppers selecting products as one of top five near-term spending priorities) Top 5 Spending Priorities by Generation (as ranked by percentage of shoppers selecting products as one of top five near-term spending priorities)

© Copyright 2014 Kantar Retail 2014 Outlook Housing Market Increased homeowner and homebuyer confidence. Strong growth in home sales Housing starts post +15% growth Strong home price growth Recovery will be mixed Existing home sales constrained Housing starts half the growth of 2013 (+7%) Sustained home inflation Interest Rates / Refinancing Fed begins to taper in December Record-low interest rates rise in the second half of the year to 4.5% Moving from positive to neutral Interest rates stay below 5.0%— very unlikely to derail recovery Job and Incomes Job gains keep solid pace Unemployment falls sharply Higher taxes dampen incomes Housing adds to recovery in some partly-recovered states and among Have Not households. Job gains persist Unemployment moves lower Income growth rebounds to a moderate pace Jobs recovery broadens across regions (CA, FL) Net outlook Strong growth in home improvement Shadowed by govt. uncertainty Home sales, job growth and renewed home owner confidence lead to outperforming channel Move from less maintaining and more improving of the home— bigger-ticket purchases Similar unit-demand growth Job, wealth, & income growth partly offsets slower home sales Households drive a higher share of sales after lagging most of the recovery Home centers benefit most from these trends

© Copyright 2014 Kantar Retail Last Year: 2013 Next Year: 2014 Past: Retail Sales: The Home Improvement Channel 12 Nominal versus inflation-adjusted or unit volume growth Sources: U.S. Department of Commerce, and Kantar Retail analysis Retail Sales Growth Rates NominalInflation-Adjusted Price Inflation NAICS Code =444

© Copyright 2014 Kantar Retail Last Year: 2013 Next Year: 2014 Past: Retail Sales: The Home Improvement Channel 13 Nominal versus inflation-adjusted or unit volume growth Sources: U.S. Department of Commerce, and Kantar Retail analysis Retail Sales Growth Rates NominalInflation-Adjusted Price Inflation NAICS Code =4441, Excludes Garden Supply Stores

© Copyright 2014 Kantar Retail Home Improvement Sales Forecast Home centers will lead growth Household and pro- customer demand likely to grow at a similar pace at home centers A let up in lumber inflation contributes to slower growth at building specialists Big-ticket projects remain in favor Home Improvement Sales Growth % Change Yr-to-Yr, Not Seasonally Adjusted Source: U.S. Department of Commerce and Kantar Retail

© Copyright 2014 Kantar Retail Key 2014 Trends 15 Gen Y vs. Boomer. Gen Y likely to retreat a bit. Boomers and seniors drive incremental home improvement purchases. Products and projects that support lifestyle change, reducing stress of chores, and promoting the creativity and “hobby” of home improvement will likely resonate. Household vs. Pro. Households will keep most of their home improvement momentum in Sustained homebuilding at a strong pace, but some maturation among professional customers. Home Center vs. Hardware. Home centers benefiting more from shoppers stepping up to bigger-ticket home improvement projects and products. Hardware stores still struggling to find footing amidst this shift in spending priorities. “Samers.” More shoppers moving to wanting to spend more in 2014, but biggest shift will be those moving from spending less to spending the same.

© Copyright 2014 Kantar Retail The Shopper in 2014: Defining the “Samers”… And What They Mean for Home Improvement 16

© Copyright 2014 Kantar Retail The Shopper in “Share of Samers” 2.A Diversifying Population 3.Online Disrupts Shopping Routines 4.Store Set Contracts in Amazon Surpasses Walmart—for Growth 6.The Store is Not Going Away… 7.But It Will Change and Evolve Who are the “Samers,” how are they shopping—and what are the implications for home improvement? Source: Kantar Retail research and analysis 17

© Copyright 2014 Kantar Retail “Share of Samers” Retailers that can win share of shoppers looking to spend the same, rather than trying to get shoppers to spend more, win Source: Kantar Retail analysis 18 1 Spend about the Same Spending Intentions in Coming Month Compared with the Same Period Last Year (three-month moving average) Spend Much/Somewhat More Spend Much/Somewhat Less

© Copyright 2014 Kantar Retail Lowe’s Shopper Base Steady Over Time Home Depot still consistently attracts more shoppers than Lowe’s, but shopper base has contracted over time Source: Kantar Retail ShopperScape ®, January 2007–November How will home improvement retailers snag more share?

© Copyright 2014 Kantar Retail Kroger: Making holiday spending “work” for the shopper by providing extra discount Menards/P&G: Rebate for stock-up spending Meijer: Adding value (free item) to “basket” promotions such as 10 for $10 Evolving Price Narratives Across Retail Focus on Getting More for Same Budgets Source: Kantar Retail analysis 20 Value-Added Pricing and Promotion Approaches: Reward Stocking Up

© Copyright 2014 Kantar Retail In Home Improvement, Differing Value Messages Source: Kantar Retail store visits, Lowe’s circular 21 Focus on Budgets at Home Depot Focus on Budgets at Home Depot Focus on Item Prices at Lowe’s Selling a solution in a “drop zone,” but still focused on prices

© Copyright 2014 Kantar Retail A Diversifying Population Diversity Index: the likelihood that two persons chosen at random from the same area, belong to different race or ethnic groups. The index ranges from 0 (no diversity) to 100 (complete diversity). Global influences making way into retailing Source: Kantar Retail analysis; US Census Bureau (2012) 22 *2012 census data 2

© Copyright 2014 Kantar Retail Online Changes Shopping Routines Source: Kantar Retail ShopperScape®, October How Approach to Shopping Has Changed in Past Year Percent of Shoppers Indicating Statement Describes “Quite Well” or “Somewhat” How Approach to Shopping Has Changed in Past Year Percent of Shoppers Indicating Statement Describes “Quite Well” or “Somewhat” Online Disrupts Shopping Routines 3

© Copyright 2014 Kantar Retail Digital, online impact on shopping is 100% Source: Kantar Retail analysis 24 10% SALES % of retail 50% INFLUENCE on purchase 100% IMPACT on shopping experience

© Copyright 2014 Kantar Retail Store Set Contracts in 2013 Source: Kantar Retail ShopperScape ®, January 2007-September *Inclusive of visits to stores and websites; averages are for Q1–Q3 of each year. Average Number of Retailers Shopped in Past Four Weeks* (among all primary household shoppers) Average Number of Retailers Shopped in Past Four Weeks* (among all primary household shoppers) The available pie is shrinking

© Copyright 2014 Kantar Retail Amazon Milestone: Surpasses Walmart As #1 growth retailer, Amazon has arrived in scale & growth Source: Kantar Retail analysis, KantarRetailiQ.com 26 Sales $s Added (US Billions) 5

© Copyright 2014 Kantar Retail At Amazon, Trial Leads to Habit, Habit to Loyalty Drives customer base ~15% each “recruiting” season Source: Kantar Retail Shoppers cape, December 2007 – September Amazon's "Loyalty" Index (% of Past 4 Week Shoppers that Are Monthly Shoppers) 2011 = 10%2012 = 14% Amazon Prime Membership Incidence (among all primary household shoppers)

© Copyright 2014 Kantar Retail Amazon Among Top Cross-Shopped Retailers Cross-shopping patterns indicate Amazon could easily steal trips Source: Kantar Retail ShopperScape ®, December 2012/January–November The Home Depot Lowe's Walmart/WMSC71%*Walmart/WMSC76% Amazon.com61%Amazon.com60% Target/SuperTarget53%The Home Depot51% Lowe's47%Target/SuperTarget50% Walgreens46%Walgreens44% CVS/pharmacy42%Kohl's42% Kohl's42%CVS/pharmacy40% JCPenney36%JCPenney37% Dollar Tree34%Dollar Tree36% Best Buy33%Dollar General33% A higher share of Lowe’s shoppers cross-shop Home Depot than vice versa Amazon eliminates trips— for projects as well as smaller-ticket, frequently- replenished items *Read as: In any given four-week period, an average of 71% Home Depot shoppers also shop Walmart/Walmart Supercenter

© Copyright 2014 Kantar Retail The Store Is Not Going Away… Source: Kantar Retail ShopperScape ®, July Way of Shopping That Provides Best Experience for Different Modes of Shopping (All Shoppers) 6

© Copyright 2014 Kantar Retail In-Store Experience Matters for Online Purchases by Home Improvement Shoppers Source: Kantar Retail ShopperScape®, July Activities by Shoppers Before Last Online Purchase (Among all shoppers) How can home improvement retailers balance these preferences?

© Copyright 2014 Kantar Retail FULFILLMENT INQUIRY But It Will Change and Evolve Stores as redistribution points, repurpose assets Source: Kantar Retail analysis, Best Buy presentation 31 7

© Copyright 2014 Kantar Retail Home Depot Leading Home Improvement on Fulfillment Source: Home Depot Investor and Analyst Conference, December “We have approximately 2,000 convenient warehouses that facilitate an interconnected experience every day” – Craig Menear, December 2013

© Copyright 2014 Kantar Retail Home Depot Moves Digital Research In-Store Keeping shoppers in the Home Depot universe Source: Kantar Retail store visit 33 Shoppers can still request in-person help Shoppers can still request in-person help “In a saturated world where growth doesn’t come from new square footage but by what you add into the square footage that you have, tools and process capabilities are very important” –Craig Menear, December 2013

© Copyright 2014 Kantar Retail What Is the Store Associate’s Role Here? Think about why a homeowner would go to a store… Source: Company reports 34 Where can suppliers exert influence on associates? Special training for associates toward project guidance Focused on customers in three phases: inspiration, planned list, multistage project Associates will be able to share info on interactions and projects 60/40 initiative progresses from 2009: up to 57% customer-facing store associate hours at the end of FY 2012 More opportunities for in-store education, e.g. Merchant Monthly Update videos

© Copyright 2014 Kantar Retail Home Depot Prioritizes the Shopper Experience Source: Home Depot Investor and Analyst Conference, December “Actions like offering our customers refreshments, putting the tool in their hand so they can try it before they buy it or having personalized training during a workshop are activities that a pure online competitor cannot replicate.” –Marvin Ellison, EVP, US Stores

© Copyright 2014 Kantar Retail Key Takeaway: Know Thyself … and Thy Shopper TSC brand stresses authenticity and solidarity with shopper Source: Company website, Kantar Retail analysis 36

© Copyright 2014 Kantar Retail Contact: Laura Kennedy Principal Analyst T: Doug Hermanson Senior Economist T: