Presented by: Doug Hermanson, Senior Economist Laura Kennedy, Principal Analyst November 15, 2013 Home Improvement Webinar Series What the Holidays Will Bring in a Zero-Sum Game

© Copyright 2013 Kantar Retail

Agenda Home Improvement: Out Capturing a Cautious Shopper –Holiday Channel and Category Forecast Early Holiday 2013: The Major Themes In Focus for 2014: Home Depot Leads the Digital Revolution in Home Improvement 3

© Copyright 2013 Kantar Retail The 2013 Retail Landscape 4 Home improvement among the leading channels Three Trends Online increasingly driving growth in retail Household spending is most focused in “investment” categories/durables Consumable channels lagged in 2013 Source: U.S. Department of Commerce and Kantar Retail Analysis *Includes discount department stores (mass merchandisers ex. supercenters) and conventional & national department stores **Includes warehouse clubs, supercenters and small-format value stores (value discounters). Excludes discount department stores (Mass merchandisers) ***The non-store channel includes the vast majority of online and catalog sales for all retailers.

© Copyright 2013 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 2013 Kantar Retail Household Spending Plans 6 Haves and Have Nots segment breakouts Haves’ spending plans have leveled off in Have Nots benefitting more from job gains and low food/fuel inflation in 2013– shifting from spending less to spending about the same. Still, share that plan to spend more– incremental spending on homegoods–led by Haves. Source: Kantar Retail ShopperScape® Have Nots Haves All Shoppers Home Improvement Shoppers’ Spending Intentions 1 Percent of Shoppers Planning to Spend About Same or More 1 Represents sum of percentage of primary household home improvement /hardware store shoppers planning to spend about the same or more in the coming month at all retail, not just home improvement 2 Haves are households with average income of $60,000 or higher, representing about 40% of households 3 Have Nots are households with average income of less than $60,000, representing about 60% of households

© Copyright 2013 Kantar Retail Source: Conference Board and Kantar Retail Measures of U.S. Consumer Confidence ( Monthly, 1985=100) Overall Confidence Index Confidence turned down in October Consumers’ expectations volatile, if not weaker in Consumers increasingly confident in their present situation in U.S. Consumer Confidence 7 Trends through October 2013

© Copyright 2013 Kantar Retail Caution Driven by Government Effects 8 Fiscal cliff to sequester. Contributed to weak first quarter Source: Calendar by digitalart, photos.com, Kantar Retail analysis Jan- March Jan 2014 July- Sept Sept – Oct Casting a shadow over holiday. New government budget deadline in mid-January. Budget ceiling likely reached soon after which would trigger another govt. shutdown. Potential Fed tapering. Debate triggers market volatility and slip in spending plans Standoff: budget debates, government shutdown, ACA. Oct 1 – October 16 Mostly temporary, but still hurting economic expectations

© Copyright 2013 Kantar Retail 9 After-tax income gains running about 1 PPT lower YTD Primarily reflects end of Social Security tax cut as sequester impact far less than feared Improving jobs recovery already pointing to longer- term, stronger income gains Growth Rate of After-Tax Household Income Not Adjusted for Inflation Source: U.S. Congressional Budget Office, Kantar Retail analysis Income: Temporary vs. Permanent Effects 2014 and beyond partly reflects softer government effects Net Income Growth Potential Sequester impact End of Social Security payroll tax cut

© Copyright 2013 Kantar Retail Consumer Credit: Revolving Credit Source: U.S. Federal Reserve Board and Kantar Retail Households still cautious in their use of credit cards Consumer Credit Outstanding* ( Quarterly, Year-to-Year % Change) Reluctance to carry credit card debt tightens shoppers month- to-month spending plans. Shoppers more reliant on savings and shifting spending between categories. *Non-Revolving loans represent automobile loans and all other loans not included in revolving credit, such as loans for mobile homes, trailers, or vacation Credit card debt growth is low compared to prerecession

© Copyright 2013 Kantar Retail Persisting Job Gains Most Positive 11 Recent trend has been stronger than conventional wisdom Source: U.S. Department of Labor and Kantar Retail Monthly U.S. Job Growth Average Month-to-Month Change in Jobs in Thousands trend is close to pre- recession job pace. Job gains focused among sectors that benefit more Have Nots–retail, food service, construction and manufacturing. October pick-up encouraging for 2013 holiday Pre- Recession Trend

© Copyright 2013 Kantar Retail Trends in Jobless Claims 12 Jobless claims significantly lower than 2012 Source: U.S. Department of Labor and Kantar Retail * Through week ending November 9, 2013 Weekly Initial Unemployment Claims * Claims are in Thousands, Seasonally Adjusted Indicates that job security for most workers is close to pre-recession levels. Job security fosters home buying and investment in homes. Hiring consistent, but tepid compared to past economic recoveries, feeding long-term unemployment. Government shutdown in October trend line Jobless claims trended lower through most of 2013

© Copyright 2013 Kantar Retail Household Net Worth Boosts Financial Security 13 Surpassed pre-recession high in 2013 Source: Federal Reserve Board and Kantar Retail Net Worth (Household assets less liabilities in billions of dollars) Net worth of households picked up in 2013 (+9.6%), boosting HI shopper spending plans. Driven by strong gains in the stock market and home prices. Households’ debt service relative to income is the lowest since at least 1980.

© Copyright 2013 Kantar Retail Who’s Driving 2013 Home Improvement? Shopping frequency at home improvement retailers significantly higher among Haves in 2013 vs Shopping frequency not significantly different among Have Nots from 2011 – Driven most by Have shoppers; Have Nots still cautious *Read as among all Have shoppers 55% shopped home improvement in the past four weeks. Arrow indicates significant increase or decrease in share compared to the prior year at the 95% confidence level SEGMENT BREAKOUTS Percent of Households Shopped Home Improvement Retailer during Past 4 Weeks Sources: Kantar Retail ShopperScape ® January 2011-October 2013, and Kantar Retail analysis

© Copyright 2013 Kantar Retail Home Improvement Gaining among Boomers No significant change in other segments but… Gen Y show some signs of shopping home centers less Seniors show signs of shopping home centers more; spending plans for this segment has expanded noticeably in 2013 after lagging recovery 15 Boomers benefited from wealth gains and refinancing Sources: Kantar Retail ShopperScape ® January 2011-October 2013, and Kantar Retail analysis Percent of Households Shopped Home Improvement Retailer during Past 4 Weeks *Read as among all Gen Y shoppers 34.9% shopped home improvement in the past four weeks. Arrow indicates significant increase or decrease in share compared to the prior year at the 95% confidence level SEGMENT BREAKOUTS

© Copyright 2013 Kantar Retail Hardware Stores Capturing Fewer Shoppers May partly reflect households moving from maintaining homes toward bigger-ticket discretionary “projects” that benefit home improvement centers. 16 Both Have and Have Nots pulled back in 2013 Sources: Kantar Retail ShopperScape ® January 2011-October 2013, and Kantar Retail analysis *Read as among all Have shoppers 15% shopped hardware stores in the past four weeks. Arrow indicates significant increase or decrease in share compared to the prior year at the 95% confidence level Percent of Households Shopped Hardware Store Retailer during Past 4 Weeks

© Copyright 2013 Kantar Retail Hardware Stores Capturing Fewer Shoppers Boomers likely shifted more spending toward home centers Gen Y likely shopping less across home centers and hardware stores. Benefiting less from wealth gains Home buying likely slowing among this segment…for now 17 Gen Y and Boomers pulled back a bit in 2013 Sources: Kantar Retail ShopperScape ® January 2011-October 2013, and Kantar Retail analysis Percent of Households Shopped Hardware Store Retailer during Past 4 Weeks *Read as among all Gen Y shoppers 9.6% shopped home improvement in the past four weeks. Arrow indicates significant increase or decrease in share compared to the prior year at the 95% confidence level SEGMENT BREAKOUTS

© Copyright 2013 Kantar Retail Holiday Forecast: About Same as Last Year Topline growth of 4% will be driven primarily by online sales gains Brick and mortar stores will grow a percentage point slower at 3% Online will continue its strong pace of growth 18 But about half PPT slower than current Q3 pace Source: U.S. Department of Commerce, and Kantar Retail analysis CHANNEL BREAKOUTS Topline: Holiday 2013 Retail Sales Breakdown* Growth Forecast vs. Prior Quarter and Prior Year * Holiday is measured as fourth quarter: October, November and December **Topline measure excludes auto, fuel, & food service channels; includes auto parts stores *** Online sales are from quarterly retail e-commerce sales reported by government

© Copyright 2013 Kantar Retail Home Improvement Holiday Forecast Channel will benefit from improved spending on appliances and home furnishings But cautious shoppers may shun add-on purchases Growth at home centers dampened by strong year-ago growth fed by Hurricane Sandy 19 Growth at or above all-retailing growth Source: U.S. Department of Commerce, and Kantar Retail analysis Home Improvement Holiday 2013 Retail Sales * Growth Forecast vs. Prior Quarter and Prior year * Holiday is measured as fourth quarter: October, November and December 1 NAICS Fourth quarter is forecast. Excludes garden supply stores 2 Includes home improvement supercenters such as Lowe's, Home Depot and Menards. Third and fourth quarter are forecast by Kantar Retail

© Copyright 2013 Kantar Retail Better Holiday for Big-ticket Categories Increased housing turnover pent-up demand and improved financial security will boost appliance spending. Pricing cutting has hurt furniture spending growth in 2013, but should benefit from recent home buying. 20 Appliances and furniture on more shoppers’ lists this year Source: U.S. Bureau of Economic Analysis, Kantar Retail analysis CATEGORY BREAKOUTS Big-Ticket Homegoods Categories ² Year-to-Year Growth Rates in Household Spending 2 Includes consumer electronics, furniture, and appliances; Holiday is measured as fourth quarter (October, November, and December). Spending in al l channels including online

© Copyright 2013 Kantar Retail Smaller-ticket Homegoods Will Lead Holiday Durable and textile home furnishings are benefiting from growth in home sales and home renovations. Weak spending on tools a concern for hardware stores and home improvement centers 21 Home furnishings will outpace most categories Source: U.S. Bureau of Economic Analysis, Kantar Retail analysis CATEGORY BREAKOUTS Small-Ticket Homegoods Categories ³ Year-to-Year Growth Rates in Household Spending 3 Includes toys, sporting equipment, tools, and durable/textile home furnishings; Holiday is measured as fourth quarter (October, November, and December). Spending in al l channels including online

© Copyright 2013 Kantar Retail Key Macroeconomic Takeaways 22 A conflicted shopper is responding by moving forward with homegoods and home improvement purchases that were put off in recent years, but is cutting back or holding the line in other areas of their spending. Shopper and macro trends are positive for home improvement in the short-run, but may be an ominous sign if government effects or higher inflation have a more permanent affect on shoppers, forcing cuts in homegoods spending. Home improvement retailers should outpace most retailers this holiday, especially among higher income and boomer/senior households. Hardware stores are lagging due to household shift to bigger- ticket homegoods purchases and some letup in the participation of Gen Y shoppers in the housing market.

© Copyright 2013 Kantar Retail Early Holiday 2013: The Major Themes 23

© Copyright 2013 Kantar Retail Early Holiday 2013: The Major Themes Online promotions kick off the season early Retailers broaden assortments to capture dollars in a cutthroat season Value continues to be a priority, though not the sole merchandising driver and more focused on budgets Festive merchandising and holiday theater are “anti- Amazon” tools Source: Kantar Retail 24

© Copyright 2013 Kantar Retail Retailers Push Holiday Online Ahead of Brick-and-Mortar Source: Kantar Retail store visits 25 November 1 October 31

© Copyright 2013 Kantar Retail Assortment: Dollar Stores Capitalize on Growth in Food, Everyday Essentials in Seasonal Offers Source: Kantar Retail store visits 26 More holiday gifts and food at Family Dollar Dollar General sells more basics, cross- merchandises food with holiday housewares

© Copyright 2013 Kantar Retail Assortment: Drugstores Branch Out to More Gifts, Bigger-Ticket Holiday Merchandise Source: Kantar Retail store visits 27 CVS merchandises gift packs, small appliances for holiday Walgreens features toys and electronics gifts prominently

© Copyright 2013 Kantar Retail Assortment: Gift Sets Stand Out and Pet Gifts Gain Prominence Source: Kantar Retail store visits 28 Meijer encourages shoppers to gift their pets with special treats; features HBA gift sets Dollar General crosses the box with holiday-themed pet toys and pet food Host and hostess gift sets at Target

© Copyright 2013 Kantar Retail Assortment: In Home Improvement, Selling Holiday Beyond Simply Décor Source: Kantar Retail store visits 29 Home Depot promotes more gift wrap supplies and suggests gift sets in more housewares categories Menards capitalizes on shoppers’ treasure hunt instinct, expands toy selection

© Copyright 2013 Kantar Retail Value: Price Messaging Acknowledges the Need to Save in the Context of a Bigger Budget Source: Kantar Retail store visits 30 At Walmart, good-better-best budget pricing (across brands) in batteries Dollar General encourages one-stop gift shopping with big discounts

© Copyright 2013 Kantar Retail Entertainment: Creating Holiday “Theater” to Assert the Store Over Online Source: Kantar Retail store visits 31 At Kroger, “holiday magic” includes advice from in-store cheese experts for entertaining “Tree farm” at Lowe’s Eye-catching food displays at Giant Eagle make grocery shopping more festive

© Copyright 2013 Kantar Retail Menards’ “Enchanted Forest,” Seasonal Merchandising Maintains the Eventful Experience Source: Kantar Retail store visit 32

© Copyright 2013 Kantar Retail Entertainment: In Home Improvement, Seizing the Educational Opportunity Using Holiday Lights Source: Kantar Retail store visits 33

© Copyright 2013 Kantar Retail Implications: Early Holiday 2013 Retailers’ approaches to the holiday season exemplify the cutthroat battle for share across retail. While some retailers, such as Home Depot and Menards, are broadening their selection to capture more dollars, others—such as the drugstores and dollar stores— are targeting their holiday selections to capture more dollars where they are most likely to succeed during the season. Online communication can be an important tool to secure share from Amazon during the holidays… Retailers jumping out to offer early holiday promotions and merchandising online were clearly trying to keep whatever share they could from online retailers, especially Amazon, which makes the hassle of holiday shopping far easier. …And so is the store. Displays like the ones Home Depot and Lowe’s feature for Christmas lights are educational tools, and give shoppers a hands-on experience online can’t achieve. The festive experiences that other retailers create are prime examples of the kind of methods retailers must deploy to convert shoppers in the store as well as to make it worth it to hold on to their real estate assets. What can home improvement retailers and suppliers learn? Source: Kantar Retail research and analysis 34

© Copyright 2013 Kantar Retail In Focus for 2014: Home Depot Leads the Digital Revolution in Home Improvement 35

© Copyright 2013 Kantar Retail How is Home Depot Removing Friction in the Path to Purchase? 36 Source: Kantar Retail Shopping Connecting Consumers Brand Awareness Discovery Shopping Connecting Consumers Brand Awareness Discovery Purchasing Speed to Conversion Enhancing the Personal Purchasing Speed to Conversion Enhancing the Personal Fulfillment Speed to Acquisition Getting Closer to the Shopper Fulfillment Speed to Acquisition Getting Closer to the Shopper

© Copyright 2013 Kantar Retail Home Depot Focuses on Mobile’s Role in the Path to Purchase Source: Kantar Retail store visit 37

© Copyright 2013 Kantar Retail Source: Home Depot mobile app 38 Home Depot Initiates Store Mapping to Make the Big Box Smaller

© Copyright 2013 Kantar Retail Augmented Reality Offers “Cool” Inspiration— and Ease of Purchase Source: Home Depot mobile app 39 Spring/summer options include landscaping, patio décor

© Copyright 2013 Kantar Retail Home Depot Uses Pro App to Deepen Relationship with Pros Source: Home Depot Pro mobile App 40 More-convenient pro fulfillment option not highlighted till the end of the purchase process Sparse but necessary options Capitalize on Pros’ repeat trips

© Copyright 2013 Kantar Retail Meanwhile, Delivery Options at Home Depot Fulfill Wherever the Shopper Wants It Source: HomeDepot.com 41 Deliver from Store is next on the list 1/3 of online orders through these two functions

© Copyright 2013 Kantar Retail Home Depot Cross-Promotes How-To on TV and Online to Drive Purchases Source: HomeDepot.com 42 Adirondack chair video pairs a HD associate and a DIY blogger Project How-To is prominent in search

© Copyright 2013 Kantar Retail Pinterest Is the New List: Focused on Personalized Planning and Triggers Source: Kantar Retail store visits, Lowes.com 43 Home Depot brings Pinterest into the store Lowe’s still uses Pinterest as a solely online vehicle

© Copyright 2013 Kantar Retail Implications: Home Depot Is Setting the Digital Standard in Home Improvement Focus on multi-channel solutions. The standout innovations across channels are functional not just within the digital universe, but rather remove friction between channels for shoppers, making their shopping experience seamless. Mobile campaigns should be distinctive and personalized. Mobile communications should not simply be shortened or miniaturized versions of e- mail or website campaigns. Mobile allows retailers to personalize and target the relationships they have with shoppers. Suppliers need to create solutions within the mobile framework. Suppliers should think critically about how they can leverage mobile to drive awareness and engagement with shoppers, understanding their key need states. Innovation must be continuous. For example, at this moment, Home Depot’s store mapping features are simply directions around the store. But in the near future, it’s possible the retailer will associate coupons or branded deals with the maps, which would force the store maps further into the category of smoothing the conversion and purchase. Source: Kantar Retail research and analysis 44

© Copyright 2013 Kantar Retail Contact: Doug Hermanson Senior Economist T: Laura Kennedy Principal Analyst T: