1. Presented by: Laura Kennedy, Principal Analyst Doug Hermanson, Senior Economist Erin Kennedy, Analyst Home Improvement Webinar Series May 9, 2014 Springing Forward Into Sustained Growth

2. © Copyright 2014 Kantar Retail Agenda Macroeconomic Conditions –Shopper DNA: Have and Have Nots Ahead for Spring: Early Indicators of Shoppers’ Plans The Role of the Home Improvement Store –Home improvement in the context of spring merchandising trends –The future of home improvement retail 2

3. © Copyright 2014 Kantar Retail Macroeconomic Conditions 3

4. © Copyright 2014 Kantar Retail * Starts and sales are through March The Housing Market: A Key Recovery Driver 4 Leading indicators— pending home sales, mortgage apps.— have only improved modestly Eventually recovery should be revived by job/income gains and added home supplies Rates will rise, but remain affordable as long as job and income gains persist Source: U.S. Department of Commerce, National Association of Realtors, and Kantar Retail Housing Market Measures* Indices, 1990=1.00 Housing Starts New & Existing Home Sales Existing home sales led the winter slowdown, but severe weather not only to blame

5. © Copyright 2014 Kantar Retail Now There Are Too Few Homes on the Market? 5 Current homeowners are cautious or unable to “trade up” Source: National Association of Realtors Six months supply consistent with the “right” level Inventories recovered from spike that was fed by foreclosures Low inventories good for home prices, but potentially bad for existing home sales Low inventories will boost homebuilding Existing Home Inventories Months Supply of Homes (through March 2014)

6. © Copyright 2014 Kantar Retail Source: U.S. Federal Reserve Board and Kantar Retail Higher rates will not extinguish recovery Will remain low enough to sustain investment and to drive persisting job, income gains Interest Rates Key to Housing/Investment Outlook 6 Rates will remain relatively low even as they begin to rise Rising how much more? Rising when & how fast? * Low point = June 2012 to May 2013 Interest Rates Over Time Periods (Average Mortgage Rate and Fed Funds Rate) Long-Term RatesShort-Term Rates 1986-1995 1978-19851996-2007 2008-2012 Low Point 2012-2013* From June 2013

7. © Copyright 2014 Kantar Retail Housing Market: Driving State/Local Conditions 7 Home prices are key market indicator of jobs and wealth gains Home prices back above pre-recession peak in 11 states (including D.C.) Still other states seeing sizeable jump in home prices from recession low Especially in West and key states (AZ, CA, FL, MI, NV) Source: U.S. Bureau of Labor Statistics, Federal Housing Finance Agency, and Kantar Retail 11% 29% 8%16%17% At or above pre-recession peak Still below peak, but growing fast Home Price Recovery by State** **Measures current home prices (through Q42013) relative to recession low point (% is increase from low) 8%57% Alaska 6% 24%23% Hawaii 24% 17% 16% 12% 24% 45% 36%41% States by Recovery in Jobs & Home Prices * Recovered states have gained back nearly all or more than all jobs lost during recession; unrecovered states have gained back less than half of jobs lost Jobs Recovery by State* Recovered Partly Recovered Unrecovered 20%14% D.C 34%

8. © Copyright 2014 Kantar Retail “...we are looking at household formation. Candidly, it was pretty weak, but…why was it so weak? It goes back to credit availability. So we need to get those millennials into a home…” -Carol Tomé - The Home Depot - EVP, Corporate Services & CFO “...we are looking at household formation. Candidly, it was pretty weak, but…why was it so weak? It goes back to credit availability. So we need to get those millennials into a home…” -Carol Tomé - The Home Depot - EVP, Corporate Services & CFO 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 recent decrease in home affordability Hurt more by tight lending standards 8 Gen Y Boomers and Seniors Source: Kantar Retail research and analysis; Company reports

9. © Copyright 2014 Kantar Retail Pre- Recession Trend 9 After-tax income gains were about 1 PPT lower in 2013 Decrease mostly due to the end of the Social Security tax cut—sequester impact was less than feared Sustained jobs recovery points to stronger income gains in the longer term 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 Effects Will Boost 2014 Sales Growth Calendar turns on temporary tax impact of 2013 Net Income Growth Likely Sequester impact End of Social Security payroll tax cut

10. © Copyright 2014 Kantar Retail Persisting Job Gains Key to Growth Pickup 10 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 April posts strong job gains after weather dampened some winter hiring Trend that emerged in 2012-2013 suggests jobs have returned to pre- recession growth Gains likely to persist given positive trends in jobless claims and investment Pre- Recession Trend

11. © Copyright 2014 Kantar Retail Confidence vs. Spending Intentions: Caution Metrics 11 For retail, spending intentions are a less volatile indicator Source: Conference Board, and Kantar Retail ShopperScape® Confidence has rebounded from Oct.- Nov. lows, but dipped slightly in April Spending intentions for home improvement shoppers moved up in March Spending intentions for all shoppers that are available for April indicate further improvement 1 Confidence is through April 2014 as reported by the Conference Board 2 Spending Intentions of home improvement shoppers from Kantar Retail ShopperScape® is through March 2014; represents sum of % of planning to spend about the same or more at all of retail in the coming month compared to a year ago

12. © Copyright 2014 Kantar Retail More Households Plan to Spend Similar 12 An improvement or deterioration depending on perspective Home Improvement Shoppers’ Spending Intentions Percent of Shoppers Planning to Spend in the Coming Month (through March 2014) 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 +4.6% -3.4% -1.2%

13. © Copyright 2014 Kantar Retail Shopper DNA: Have and Have Nots 13

14. © Copyright 2014 Kantar Retail Shaped by What Defines and Divides Them External forces further divide Haves and Have Nots Source: Kantar Retail analysis 14 Haves … Part of large younger, working-age cohort Some wealth A college degree Married/couple An urban resident Plan to retire late Have Nots … Part of large older cohort nearing retirement Little wealth No college degree Unmarried/divorced A non-urban resident Plan to retire early Have Nots: Losing share of income Haves: Gaining share of income Inflation Government Austerity Haves… Some wealth A college degree Married/couple Plan to retire late Have Nots… Little wealth No college degree Unmarried/divorced Plan to retire early “The US is experiencing bifurcation of income with the middle class shrinking... [T]his bifurcation will challenge the traditional thinking about line structures and it could provide opportunity for us on both ends.” -Craig Menear, The Home Depot “The US is experiencing bifurcation of income with the middle class shrinking... [T]his bifurcation will challenge the traditional thinking about line structures and it could provide opportunity for us on both ends.” -Craig Menear, The Home Depot

15. © Copyright 2014 Kantar Retail Government Aid = About 1/3 of Have Not Income Grown significantly in 40 years, especially last few years 15 40% of households 60% households “Have Nots” “Haves” ~25% income  < $62,000 Per Year ~75% of income > $62,000 Per Year Household Income  Paycheck $ Sources: 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

16. © Copyright 2014 Kantar Retail Where do Have & Have Nots Spend the Most? Source: Kantar Retail ShopperScape®, January 2013–March 2014 16 Haves more likely to spend the most at Lowe’s and The Home Depot than Have Nots Where Shoppers Spend the Most on Home Improvement Products Highlighting indicates significant difference between Haves and Have Nots Have Nots more likely to spend the most at Hardware Stores and Walmart than Have households

17. © Copyright 2014 Kantar Retail What Appeals to Have & Have Nots Source: Kantar Retail ShopperScape®, January 2013–March 2014 17 Have Nots most likely to be focused on price when choosing a retailer Why Shoppers Choose the Retailer Where They Spend the Most on Home Improvement Products Highlighting indicates significant difference between Haves and Have Nots Selection, quality, and shopping experience more likely to influence where Haves spend the most Convenience most important for both segments, but more so for Haves

18. © Copyright 2014 Kantar Retail Shopper DNA: Most Important Factors When Shopping Source: Kantar Retail ShopperScape®, January and February 2014, and Kantar Retail analysis How age-income segments differ from shared factors of importance 18

19. © Copyright 2014 Kantar Retail Retailers' Shopper Mix Relative to Overall Shopper Mix* Source: Kantar Retail ShopperScape®, January-December 2013, and Kantar Retail analysis 19 *For 2013, Based on Past-Four Week Shoppers 1 Youngest Have Not households will grow ~ 2% per year; 15% in total by 2020; 2 Oldest Have Not households will grow ~ 3.8% per year; 30% in total by 2020; 3 Oldest Have households will grow ~ 1.6% per year; 12% in total by 2020; 4 Youngest Have housholds may show little or no household growth; *Have households=income greater than $60,000 per year for U.S. households **Have Not households = income less than $60,000 per year for U.S. households

20. © Copyright 2014 Kantar Retail Key Macroeconomic Takeaways 20 Macroeconomic Conditions. o Winter slowdown due to reduced home affordability and tight home inventories, as well as severe weather o Job gains will alleviate or offset any softness in home sales in 2014, keeping home improvement spending growing at a solid pace Have and Have Nots. o Understanding how younger and older shoppers shape Have and Have Not shopping trends will be key for the home improvement channel o Older Haves that are currently the largest shopping base for home improvement are expected to grow in numbers, but will have different needs and wants o The biggest growth in households will be among Have Nots. Appealing to the differentiating needs of young and old Have Nots will be needed to sustain solid-to-strong growth in the channel

21. © Copyright 2014 Kantar Retail Ahead for Spring: Early Indicators of Shoppers’ Plans 21

22. © Copyright 2014 Kantar Retail Home Improvement Shopper Penetration Picks Up But still down from the same time last year Source: Kantar Retail ShopperScape®, March 2012-March 2014 22

23. © Copyright 2014 Kantar Retail Will Take Two Drive Traffic in Q2? Lowe’s, Home Depot intensify spring promotions Source: Kantar Retail store visits; company websites 23 April 7, 2014 May 7, 2014

24. © Copyright 2014 Kantar Retail Younger Shoppers Could Drive Spending This Year Source: Kantar Retail ShopperScape®, March 2014 24 Plan to spend… A lot/little more About the same A little/lot less All Shoppers 21%47%31% Generation Y23%51%26% Generation X22%51%27% Baby Boomers21%46%32% Seniors17%37%45% Children <19 at home24%49%27% No children <19 at home20%47%33% Haves26%49%25% Have Nots18%46%36% Home Improvement Project Spending Plans (Among all shoppers) Note: Bolded red percentages are significantly lower than all shoppers at 90% confidence, and bolded green percentages are significantly higher than all shoppers at 90% confidence Looking to maintain or boost HI spending versus last year; less likely to spend less

25. © Copyright 2014 Kantar Retail Households Plan Painting, Minor Projects Flooring tops bigger-ticket projects on shoppers’ lists Source: Kantar Retail ShopperScape®, March 2014 25 Types of Home Improvement Projects That Shoppers Will Spend on This Spring (Among all shoppers)

26. © Copyright 2014 Kantar Retail Haves Lean Toward Bigger-Ticket Projects Source: Kantar Retail ShopperScape®, March 2014 26 Home Improvement Project TypeHave NotsHaves Paint or faux finish an interior room28%32% Minor plumbing (e.g., replace a faucet)18%19% Paint exterior of residence15%13% Minor electrical (e.g., install a ceiling fan or light fixture)14%16% Install new window treatments (e.g., blinds, curtains)13%14% Install organization/storage system (e.g. in closet, bedroom, kitchen, bathroom, garage, etc.) 12%13% Install new carpet, flooring, or tile12%17% Make energy-efficient upgrades10%11% Replace roof, siding, or windows9%7% Renovate a bathroom9%13% Build a deck or patio6%7% Renovate a kitchen6%7% Set up a nursery/child's room4%3% Room addition3% Finish a basement2%4% Home Improvement Project Type (Among shoppers who plan to complete at least one project) Only project type that Have Nots outnumber Haves What does this difference say about Have vs. Have Not values? Note: Bolded red percentages are significantly lower than all shoppers at 90% confidence, and bolded green percentages are significantly higher than all shoppers at 90% confidence

27. © Copyright 2014 Kantar Retail Painting Projects Rank Higher for Have Nots Source: Kantar Retail ShopperScape®, March 2014 27 Haves Project Ranking* Have Nots Project Ranking* Paint or faux finish an interior room Minor plumbing Install new carpet, flooring, or tile Minor electrical Install new window treatments Install organization/storage system Paint exterior of residence Renovate a bathroom Make energy-efficient upgrades Replace roof, siding, or windows Paint or faux finish an interior room Minor plumbing Paint exterior of residence Minor electrical Install new window treatments Install organization/storage system Install new carpet, flooring, or tile Make energy-efficient upgrades Replace roof, siding, or windows Renovate a bathroom 1 2 3 4 5 6 7 8 9 10 *Rank was determined by ordering the percentage of people who plan to complete the project from highest to lowest.

28. © Copyright 2014 Kantar Retail Difference in Rankings Among Generations Reflect Life Stage Priorities Source: Kantar Retail ShopperScape®, March 2014 28 Gen Y’s RankingBoomers’ Ranking Paint or faux finish an interior room Install organization/storage system Install new window treatments Minor electrical Minor plumbing Renovate a bathroom Paint exterior of residence Install new carpet, flooring, or tile Make energy-efficient upgrades Set up a nursery/child's room 1 2 3 4 5 6 7 8 9 10 Paint or faux finish an interior room Minor plumbing Paint exterior of residence Minor electrical Install new carpet, flooring, or tile Install new window treatments Renovate a bathroom Make energy-efficient upgrades Install organization/storage system Replace roof, siding, or windows Cheap, least invasive *Rank was determined by ordering the percentage of people who plan to complete the project from highest to lowest.

29. © Copyright 2014 Kantar Retail Households Focused Most on Lawn Care More discretionary gardening projects also part of spring plans Source: Kantar Retail ShopperScape®, March 2014 29 Types of Gardening and Landscaping Projects That Shoppers Will Spend on This Spring (Among all shoppers)

30. © Copyright 2014 Kantar Retail The Role of the Home Improvement Store: Spring Merchandising Trends 30

31. © Copyright 2014 Kantar Retail Home Depot Focuses on Savings, Lowe’s Focuses on Occasions Source: Kantar Retail store visit 31

32. © Copyright 2014 Kantar Retail Spring Trends Across Channels Source: Kantar Retail analysis 32 Vibrant Marketing In-store Online Shopper Engagement Pre-trip planning Savings/loyalty In-store experience Springtime Solutions Easter/Holiday Spring Cleaning Outdoor living How home improvement retailers fit into the landscape

33. © Copyright 2014 Kantar Retail Source: Kantar Retail Analysis, Company website, Company Twitter, Facebook 33 An email from Lowe’s offers tips for springtime projects Home Depot engages with shoppers via social media sites, project guides on HomeDepot.com Home Depot and Lowe’s Acknowledge Pre-Trip Planning Online Shopper Engagement

34. © Copyright 2014 Kantar Retail Source: Kantar Retail store visits 34 Lowe’s Leverages NCAA March Madness as a “Microseason” Leading Up to Spring Lowe’s teamed with Scotts to offer March Madness promotion LG’s “Let’s Do Game Day Right” promotion is featured among Lowe’s kitchen displays Shopper Engagement

35. © Copyright 2014 Kantar Retail Source: Kantar Retail store visits 35 Lowe’s and Home Depot Create a Bright and Festive Experience Colorful duct tape brightens aisles and builds baskets at Lowe’s Vibrant Marketing Balloons create a pleasant and festive shopping experience at Home Depot Bright “spring is calling” signs set the mood at Lowe’s

36. © Copyright 2014 Kantar Retail Source: Kantar Retail analysis & store visits 36 Lowe’s Emphasizes Spring Cleaning and Home Refresh Lowe’s uses colorful displays to promote spring cleaning and painting; Drop zones and end caps build baskets by providing shoppers with all of the necessary supplies to take on a cleaning or painting project Springtime Solutions

37. © Copyright 2014 Kantar Retail Spring Black Friday signage features grilling solutions and patio furniture Pre-packaged gardening set offers solution for new gardeners Source: Kantar Retail research and store visits 37 Home Depot Solutions Focus on Outdoors Springtime Solutions Co-branded entertainment solutions, plus gardening projects In the Garden Center, directing shoppers online; prominence of branded guidance

38. © Copyright 2014 Kantar Retail Source: Kantar Retail research and store visits 38 Healthy Lifestyles Gain Prominence in Garden Center Springtime Solutions

39. © Copyright 2014 Kantar Retail Walmart’s Outdoor Event Aims to Drive Seasonal Traffic Source: Kantar Retail store visits 39 A seed display frames gardening as the way to a healthy lifestyle Springtime Solutions Walmart’s lawn and garden section is equipped with grilling solutions Co-branded Burpee display with Scotts

40. © Copyright 2014 Kantar Retail The Role of the Home Improvement Store: Store of the Future 40

41. © Copyright 2014 Kantar Retail Given the Impact of Digital…What Role Will the Store Play Going Forward? Source: Kantar Retail research and analysis 41 The store is just one touchpoint with the shopper

42. © Copyright 2014 Kantar Retail Going Forward, the Store Must Seize Its Role Inspiration Navigation Education Source: Kantar Retail analysis 42 Where are we seeing glimmers of this now?

43. © Copyright 2014 Kantar Retail Guiding the Shopper Through the Shelf is Simple, But Inconsistent Source: Kantar Retail store visits 43 ? ? Information, but no real guidance Elsewhere, brands provide the guidance

44. © Copyright 2014 Kantar Retail Lowe’s Garden Center Showcases More Shelf Guidance Source: Kantar Retail store visit 44

45. © Copyright 2014 Kantar Retail Garden Centers Continue to Highlight HI Retailers’ Educational Capabilities Source: Kantar Retail store visits 45 Plus provides cross- branded solutions

46. © Copyright 2014 Kantar Retail Home Depot Focuses on Branded Education in Garden Source: Kantar Retail store visits 46

47. © Copyright 2014 Kantar Retail Spelling Out Project Steps Creates a Shopping List Source: Kantar Retail store visits 47 But there is such a thing as too much information…

48. © Copyright 2014 Kantar Retail Are These Bathroom Displays the “Pods” of the New Customer Experience? Source: Kantar Retail store visit 48 Each element of the design is identified, priced; encouraged to shop on Lowes.com Accessories (PL and national brands) displayed adjacent “[Shoppers] told us they wanted to visualize the results of this project…they want to understand what it looks like in end use, but they also wanted the touch and feel of the projects, with the different products.” –Greg Bridgeford, February 2014

49. © Copyright 2014 Kantar Retail Home Depot Builds Online into Its Solutions Source: Kantar Retail store visits 49

50. © Copyright 2014 Kantar Retail From Other Channels, Future Store Takes Shape Inspiration Navigation Education Source: Kantar Retail analysis 50

51. © Copyright 2014 Kantar Retail Kroger Recipe Stations Provide Instant Solutions Could HI project ideas be digitized? Source: Kantar Retail store visit 51 Present shoppers with a multitude of meal solutions based off of season, type of meal, prep/cook time.

52. © Copyright 2014 Kantar Retail How could sampling be integrated with new products? Sam’s Club Automates Free Samples w/ Freeosk Source: Kantar Retail store visit 52 Freeosk allows shoppers to learn about a product, try it, and grab a full size all in one place Bright orange “FREE SAMPLE” sign will attract shoppers A digital screen displays an ad for the product. Shoppers scan their loyalty card for a sample

53. © Copyright 2014 Kantar Retail Drugstores Offer Pharmacy Services Online Could more on-demand services be on the way for DIY? Source: 53

54. © Copyright 2014 Kantar Retail Closing Considerations: Seize the Chance to Shape the New HI Experience Find opportunities to: –Help shoppers navigate the store—including online. This will require working with retailers to create signage and other informational material. Identifying opportunities to co-merchandise and provide solutions will also be helpful. –Educate shoppers, as well as associates and your retailer partners. At times, it will be necessary to build both the category and your brand. Emphasize the importance of the in-store associate to this mission. And remember that cost remains a concern for shoppers at all ends, so explaining the value of your product will be crucial. –Inspire shoppers to build baskets—and retailers to create projects. Here is where data will be crucial. Determining shoppers’ paths to purchase and pinpointing where you can build loyalty for both your brand and the retailer’s will help keep shoppers from falling down “chutes” created by digital. Source: Kantar Retail research and analysis 54

55. June 4–5 in Chicago, IL or June 18–19 in New York, NY Forum Mid Year New Planning Coordinates: Navigating The Multichannel World Join Kantar Retail thought leaders for our signature Mid Year Forum aimed at ensuring you formulate future plans that are strategically vital, predictively accurate, and closely aligned against your most important customers. Please email events@kantarretail.com for more information.

56. © Copyright 2014 Kantar Retail Contact: Laura Kennedy Principal Analyst Laura.Kennedy@kantarretail.com 617.912.2851 www.kantarretailiQ.com Erin Kennedy Analyst Erin.Kennedy@kantarretail.com 617.912.2849 www.kantarretailiQ.com Doug Hermanson Senior Economist Doug.Hermanson@kantarretail.com 614.355.4044 www.kantarretailiQ.com