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November 2011

2011 AnnuAl RepoRt


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Hardware Retailing

www.nrha.org

By Dan Tratensek, dant@nrha.org

Improvement
Market profile
Despite Limited Growth, Industry Still Waiting for Recovery
ou know that feeling you get when you are sitting in a restaurant waiting for the server to bring your drinks and she just keeps passing by your table. You check your watch, you clear your throat and you think to yourself the drinks have to get here any minute, Ive been waiting so long.
Yet when the kitchen door swings open, all the server has is a tray with three orders of lasagna for table six and your drinks are still nowhere in sight. thats kind the same kind of feeling we all have right now in regard to the economic recovery. we got our table, ordered our drinks and here we sit waiting for unemployment to improve, waiting for stocks to bounce back and waiting for houses to start sellingthe whole time wishing we had a drink. in 2009, we saw the home improvement market bottom out somewhere in the high $260 billion range and at a five-year low. So, we knew things would have to get better in 2010. And they did. in 2010, the home improvement industry posted sales of $277.7 billion according to our estimates. this represented an increase in industry sales of about 4.7 percent year over year.

Retail Home

A Mixed Blessing
while it may seem hard to give the government much credit for doing anything right these days, it seems that the tax incentives offered to new homeowners during the first several months of 2010 actually helped fuel sales in the home improvement industry.

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November 2011 Hardware Retailing

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the Industrys Annual Report


total Retail Sales By Home Improvement Retailers
(Sales in Billions)
CAG-Compound Annual Growth

2011 AnnuAl RepoRt

Unfortunately, the governments hope that the tax incentives would give the housing market a push start failed to come to fruition, and after the incentives expired, housing returned to its new normal levels throughout most of the remainder of the year. the good news for the home improvement industry heading into the last half of 2010, however, was that the industry was once again growing. After three consecutive years of declines, home improvement sales in the U.S. were actually on the uptick again. heading into 2011, once again we looked longingly at that kitchen door and thought to ourselvesour drinks have to be coming out next. the good news is, we got our drinks. the bad news, the order was wrong. Last year, we predicted that 2011 sales would increase to $294.7 billion. we felt that this strong increase would be fueled by a rebound in the housing market as affordability hit new levels and even cash-strained buyers would take advantage of low prices. At the time, our estimates of a housing rebound and more robust economic recovery were earlier than some other analysts had predicted but we were confident that pent up housing demand would cause movement in the market. By now, we are well into 2011 and we have all realized that the recovery in the housing sector still lies further down the road. But thats not the only bad news

$400

CAG 2010-2015 = 3.9%

CAG 2005-2010 = 0.41%

$350
$300.6 $300.3 $294.5 $294.9 $307.1 $320.6

$272.1

$250
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

$200

*Number revised downward from 2010 reports.


Lending. in the wake of the financial crisis a few years ago banks have certainly tightened lending restrictions. while most mortgage brokers will tell you that home loans are still out there to be had, they do require cleaner credit and a higher down payment. it is the second part of this requirement that is keeping many younger consumers out of the market. tighter lending restrictions have also had an impact on businesses that have seen banks rein in their credit lines.

that hampered industry growth in 2011. here are a few other factors that held the industry down this year: Unemployment. despite record levels of housing affordability and record lows for mortgage rates its hard to qualify for a loan if you dont have a job. And you cant discount the fact that unemployment rates can negatively impact even individuals who have jobs as they cast a specter over the nations entire economic outlook.

Industry Sales Methodology


NRHA and Hardware Retailing take a large number of factors into account when determining our overall sales estimates for the industry. We use a formula that incorporates information from NRHAs Annual Cost of Doing Business Study, direct retailer research, the U.S. Department of Commerce NAICS 444 sales reports and information from other research outlets as the basis for our calculations. We then weight this information against company reports from the industrys publicly traded corporations, wholesaler sales figures and additional data from retail and industry partners. All of this data is combined using a formula to determine our industry sales estimates and forecasts. NRHA and Hardware Retailings industry estimates consider sales from all retailers whose primary business is selling home improvement products. We do not include sales from operations that do not utilize a retail sales model or service only other companies. Our estimates include sales through the industrys hardware stores, home centers, big-box outlets and retail lumberyards.

November 2011

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Hardware Retailing

$265.2*

$277.7

$284.1

$300

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$336.3

Another View
2011 $270 Bil. 2012 2013 2014 2015
$250 $300 $285.8 Bil. $301.6 Bil.
To keep perspective on how other analysts see the home improvement retail industry developing over the next several years, to the left are the predictions from the IHS Global Insights and the Home Improvement Research Institute (HIRI).
Source: IHS Global Insights/HIRI

$322.7 Bil. $341.1 Bil. $350 $400

improvement industry. And while some of the growth through the first two quarters of the year seemed modest, consider that these year over year advances were competing against the tax-incentive fueled sales of 2010. As a result, we are anticipating sales in 2011 to ring in at $284.1 billion, well short of our prediction from last year but still an increase of about 2.3 percent over 2010s totals.

What Lies Ahead?


that leaves us with the question of what lies ahead for the industry next year and moving into the next several years. no longer can industry watchers just look at the industry and predict measured growth. now, each year predicting how the future will play out is much more difficult. we, along with most other analysts, still believe the housing market is set for a rebound and when that rebound occurs, the home improvement industry will experience a strong lift. the real question is, when will housing bounce back? right now, nrhA feels that 2012 will see moderately strong growth in the industry but the biggest leap forward will occur in the late 2012 to 2013 time frame. By this time, a lot of issues will begin to settle out politically and whether as a result of election-year politics, a new administration or a genuine-desire to pull the country out of financial morass, we are likely to see some form of job and housing incentive programs take root. once unemployment begins coming down, and particularly if there are incentives to help home buyers back on the table, the nations consumers should start chewing through housing inventory and construction should ramp up. But for now, we are still sitting here, staring at the kitchen door, wondering when the drinks we ordered will finally arrive.
November 2011 Hardware Retailing

this has caused some retailers to hold back on expansion plans, adding new product lines and other business moves that could have helped promote sales. Governmental Gridlock. if you havent noticed, there is a bit of acrimony in washington these days. the political powers that be on both sides of the aisle seem to be more concerned with keeping score than they do with solving the nations economic troubles. Meanwhile in 2011 we saw the nation pushed to the brink of defaulting on its loans. none of this incites confidence among consumers or business owners who see whats going on economically in other countries around the world that were once thought to be financially strong.

Changing Habits
So, now that we have discussed all the factors that stunted growth in 2011, you may be wondering, were there any bright spots? the short answer is yes. while the economic tenor in our nation today is skewed to the negative, consumers are still spending money on home improvement and here are a few points about how their habits have changed:
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Home repair and maintenance is still a primary catalyst. with many people choosing to forego moving into a new home, they are left having to repair and maintain existing homes. while it is true that more is typically spent on home improvement purchases around the sale of a home, that doesnt mean people arent spending to fix toilets, paint rooms, carpet floors and more. The rental market. this is one area of the housing industry that is actually robust these days. As more young people delay purchases or families find themselves no longer in the market for buying a homerental is the only option. this surge in rental activity means sales of products to property owners as rental clients turnover. Niche areas. despite the down economy, Americans still find ways to spend money on their hobbies and luxuries and many of these items are sold through home improvement channels. take for instance the boom weve seen in pet supplies, farm and ranch, lawn and garden and hunting and outdoors products. this consumer spending resulted in slight gains in 2011 for the home

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the Industrys Annual Report

2010-2015

2010-2015

Sales By type of Store


2011
Sales in Billions

outlets
hardware Stores home centers 19,940 9,755 9,800

hardware Stores home centers

$37.8 $172.7 $67.2

DIY Sales By Month


Sales in Billions

2010

Lumberyards

2010

Lumberyards

January February March April May June July August*

$24.1 $23.9 $24.6 $24.7 $24.8 $25.1 $25.0 $25.0

totAl
hardware Stores home centers

$277.7
$38.1 $176.8 $69.2

totAl
hardware Stores home centers

39,495
19,940 9,750 9,775

2011

Lumberyards

2011

Lumberyards

totAl
hardware Stores home centers

$284.1
$39.5 $182.9 $72.5

totAl
hardware Stores home centers

39,465
19,920 9,720 9,750

2012

Lumberyards

2012

Lumberyards

totAl
hardware Stores home centers

$294.9
$41.2 $188.9 $77.0

totAl
hardware Stores home centers

39,390
19,900 9,710 9,725

2011 AnnuAl RepoRt

Source: U.S. Department of Commerce/NAICS 444/Seasonally Adjusted

2013

Lumberyards

2013

Lumberyards

Sales Growth 2011 vs. 2010


January February March April May June July
10.6% 8.7% 5.5% -3.3% 5.3% 7.9% 7.2% 6.6% Compound Growth Rate

totAl
hardware Stores home centers

$307.1
$44.1 $198.3 $78.2

totAl
hardware Stores home centers

39,335
19,900 9,650 9,775

2014

Lumberyards

2014

Lumberyards

totAl
hardware Stores home centers

$320.6
$46.2 $206.2 $83.9

totAl
hardware Stores home centers

39,325
19,890 9,675 9,785

2015

Lumberyards

2015

Lumberyards

totAl
hardware Stores home centers Lumberyards

$336.3
4.1% 3.6% 4.5%

totAl
hardware Stores

39,350
-0.25% -0.82% -0.15%

November 2011

August*

Source: U.S. Department of Commerce/NAICS 444/Seasonally Adjusted *Preliminary

2010-2015

totAl

3.9%

percent Change 2010-2015

home centers Lumberyards

totAl

-0.379%

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Hardware Retailing

www.nrha.org

top 10 Results

Growth profile Market Share profile

top 10 Hardware, Home Center and lumberyard Chains


Sales
(as % of total industry)

top 10 Chains
Net Sales
(in billions)

No. of Stores 5,371 5,672 5,532 5,318 5,725

No. of Stores
(as % of total industry)

2006 2007 2008 2009 2010 2006-2010


Compound Annual Growth Rate

$167.1 $152.8 $142.1 $130.7 $131.3

2006 2007 2008 2009 2010 2006-2010


Percentage Point Change

55.6% 50.9% 48.3% 48.2% 47.2% -8.4%

13.0% 13.8% 13.7% 13.4% 14.4% 1.4%

-5.8%

1.6%

Ranking top 10 Home Improvement Chains


2010 Sales
(in billions)

Stores at End of 2010 2,248 1,749 457 470 240 281 57 106 55 88

Stores as of Fall 2011 2,242 1,753 460 450 260 265 57 94 55 89

Home Depot

2011 AnnuAl RepoRt

Atlanta

$68.0 $49.0 $4.1 $3.5 $2.2 $1.5 $0.9 $0.7 $0.7 $0.7

lowes
Mooresville, N.C.

ABC Supply
Beloit, Wis.

pro-Build Holdings
Denver

Menard Inc.
Eau Claire, Wis.

84 lumber
Eighty Four, Pa.

Stock Building Supply


Raleigh, N.C.

Sears Hardware Stores


Hoffman Estates, Ill.

Sutherland lumber
Kansas City, Mo.
November 2011

orchard Supply Hardware


San Jose, Calif.
Source: Company Reports and Hardware Retailing Estimates

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Hardware Retailing

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Industry

Year in Review
December 2010
Orgill formed a partnership with canadas castle Building centres Group and began serving retailers throughout the country. By the end of 2011, orgill plans to have all products become canadian compliant in terms of packaging and languages.

January 2011
True Value announced its comparable-store sales were up 0.3 percent for 2010. the company also reported that its new e-commerce initiatives were successful, noting that more than 70 percent of the online purchases are shipped to true Value stores for customers to pick up. Lowes Cos. laid off 1,700 middle managers nationwide and added thousands of hourly, part-time sales staff on weekends. the company redefined hundreds of middle-management jobs and eliminated those between assistant store manager and store manager.

Home Depot reported sales of $15.1 billion for the fourth quarter of fiscal 2010, a 3.8 percent increase from the fourth quarter of fiscal 2009. comparable-store sales were up 3.9 percent, and comp-sales for U.S. stores were up 4.8 percent.

2011 AnnuAl RepoRt

February 2011
Lowes former president Larry Stone announced he would retire on June 2, after 42 years with the company. U.S. factories out-produce chinese manufacturers by more than 40 percent despite closing factories and lost manufacturing jobs. Lowes reports that its comparablestore sales increased 1.1 percent and its net earnings were up 39 percent in the fourth quarter of 2010. Sales increased 3.1 percent to $10.5 billion, up from $10.2 billion in the fourth quarter 2009. Walmart reported 2010 fourth quarter net sales for 2010 topped $405 billion, an increase of 1 percent over fiscal year 2009. walmart U.S. comparable-store sales for the fourth quarter were below guidance. net sales for the fourth quarter of fiscal year 2010 were $112.8 billion, an increase of 4.6 percent from $107.9 billion in the fourth quarter of 2009.
Hardware Retailing

March 2011
Blish-Mize celebrated its 140th anniversary at its spring buying market in overland Park, kan. the hardlines distributor was founded in 1871 by three brothers-in-law and is still family owned and operated today. Ace Hardware reported its merchandise sales to comparable domestic stores increased $40.6 million in the fourth quarter of 2010, compared to 2009. Fourth quarter total revenues were $859.3 million, an increase of $59 million or 7.4 percent from 2009.

Handy Hardwares first quarter results showed overall sales increased 4.1 percent compared to the same time in 2010. the company also transitioned to a new computer operating system during the first quarter of 2011.

May 2011
Home Hardware Centers and tyndale Advisors created a new retail operations and management company, the central network retail Group (cnrG), LLc. cnrG is jointly owned by the two companies and will initially own and operate the home hardware center chain while the new management and operations structure will serve as a platform for future retail growth. cnrG said it hoped to expand home hardware center retail operations beyond Mississippi and Louisiana.
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April 2011
Walmart began building its first express storea small format store which is less than one-tenth the size of an average walmart Supercenterin Gentry, Ark., about 20 miles southwest of walmarts Bentonville headquarters. the new express store measured 14,400-square-feet.

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November 2011

Ace Hardware reported that its first quarter merchandise sales to comparable domestic stores increased 2.2 percent compared to 2010 and total revenues increased 2.8 percent to $23.4 million. Lowes Cos. reported its comparablestore sales decreased 3.3 percent and sales decreased 1.6 percent to $12.2 billion from $12.4 billion during the first quarter. Target announced comparable-store sales increased 2 percent during the first quarter while walmarts comp-store sales dropped 1.1 percent. however, walmarts first quarter net sales were up 1.1 percent and targets sales increased 2.8 percent. Home Depot reported its overall comparable-store sales decreased 0.6 percent and U.S. comparable-store sales down 0.7 percent. Sales for the first quarter decreased 0.2 percent to $16.8 billion. RONA announced its first quarter same-store sales decreased 12.6 percent
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and total sales decreased 4 percent or $38.7 million; net income was down $19.8 million. The Merit Group, which does business as Lancaster and Five Star, filed to reorganize under chapter 11 of the U.S. Bankruptcy code. the company obtained a commitment of a $55 million debtor in possession facility from its senior lender, regions Bank, to continue operations during the reorganization process. Home Depot introduced a handheld device into its stores that can be used as a phone, walkie-talkie and a mobile cash register. home depots First Phone can be used not only to update inventory counts, but also to answer customers questions and process their sales transactions without having to go up to the registers. The National Hardware Show saw a 4 percent increase in attendance this year, on top of the 20 percent increase in 2010.

June 2011
Walmart lost its appeal of most of a $187.6 million verdict for Pennsylvania hourly workers who accused the worlds largest retailer of denying them meal and rest breaks. A survey showed more retailers are falling victim to organized crime. of 129 retailers surveyed, 94.5 percent said they were victimized by organized criminals in the past year. 84.8 percent said the problem has only worsened in the past three years.
November 2011 Hardware Retailing

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Industry

Year in Review

July 2011

2011 AnnuAl RepoRt

The Federal Reserve Board set the cap on so-called swipe fees at 21 cents, up from the 12-cent cap it proposed late last year. this number is still down from the previous average debit card transaction cost of 44 cents.

August 2011

November 2011

True Value reported comp-store sales down 0.1 percent in the first six months of 2011. revenue increased 0.4 percent to $529.5 million in the second quarter and overall revenue for the first half of the year was $977.3 million, an increase of 2.2 percent compared to the same time a year ago. Lowes Cos. reported comparablestore sales for the second quarter decreased 0.3 percent and decreased 1.7 percent for the first half of 2011. Sales for the quarter increased 1.3 percent to $14.5 billion, up from $14.4 billion in the second quarter of 2010. the company also announced that it will buy back up to $5 billion of its
Hardware Retailing

common stock and abruptly closed seven stores following the release of its second quarter financial report. Sears second quarter financial results showed total revenues decreased $125 million to $10.3 billion and overall domestic comparable-store sales decreased 0.7 percent. Sears comparable-stores sales decreased 1.2 percent and kmarts comparable-store sales were flat. Sears canada comparable-store sales dropped 5.8 percent. Ace Hardware reported a 0.6 percent comparable-stores sales increase in the second quarter compared to the previous year. revenue increased $5.6 million to a total of $1.021 billiona 0.5 percent jump from the same quarter in 2010. Walmart reported comparable U.S. sales were down 0.9 percent in the second quarter. net sales for the second quarter were $108.6 billion, up 5.5 percent from the same period last year. The Home Depot reported second quarters sales rose 4.2 percent from the second quarter of fiscal 2010 to $20.2 billion. comparable-store sales were positive 4.3 percent, and comp-sales for U.S. stores were positive 3.5 percent.

Do it Best Corp. expanded operations into Southeast Asia with the soft opening of the first of four Pongs do it Best home centers. the first store opened on Aug. 4 in Jakarta, indonesia.

September 2011
Ace Hardware increased its craftsman product offerings to more than 1,050 products in more than 1,000 Ace stores nationwide. Ace first started selling craftsman-brand products in 2010 and more than 1,200 of its stores will carry a full line assortment by the end of 2011.

October 2011
Orchard Supply Hardware became independent from former parent company Sears holdings corp. and announced plans to build 30 to 40 new stores throughout california in the coming years. Ace Hardware broke ground in Suffolk, Va., where its new 336,000-square-foot import re-distribution center (rdc) will be built. construction is scheduled for completion on May 1, 2012.
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Retail Store performance

Gap Widens Between High-Performance and Average Retailers

November 2011

y most any measure, 2010 was not a banner year for the home improvement industry. one thing we did learn, however, was that there was a widening gap between the strong performers and the also-rans. Across all store formats in the home improvement industry the gap between the high-end performers and the average performers widened in 2010. this seems to suggest that bestin-class retailers are managing to steal business from the average stores. this trend seems to have been exacerbated by the economic conditions in the country but it also appears to be a darwinian process that has been unfolding in home improvement retailing dating back well before the nations recent economic woes. Simply put, the best of the best continue to outperform marginal stores at a much greater rate. this suggests that the typical home improvement store isnt just competing against the local big box for business. instead, an average hardware store, home center or lumberyard also has to be highly concerned about other independent stores who have better cost controls, cash flow and a more compelling value proposition to consumers. Like in many business scenarios, tough financial times dont necessarily create problems for companies but they often bring existing problems into clearer focus. while reviewing the numbers on the following pages it is extremely important to note that these figures are derived from the north American retail hardware Associations Cost

of Doing Business (codB) study. the 2011 codB is a compilation of performance numbers for hardware stores, home centers and lumberyards from 2010. each year this report contains numbers from a different sample group of stores. that means overall sales figures will vary widely based on the respondents. this year, we have highlighted some of the statistics from stores that participated in both of the last two studies to give a comp-store comparison where appropriate.

Hardware Stores
in 2010, the average hardware store didnt experience a lot of growth. in fact the average store participating in our codB study reported sales of $1.29 million. while the study respondent sample changes from year to year, from an overall historical trends perspective, this indicates that the combination of consumer insecurity and record low housing activity (with both new and existing home sales) continued to keep industry growth in check throughout 2010. the average customer count at the typical hardware Store was 80,000, which is consistent historically. one of the dominant trends that emerged is a sales polarization of hardware Stores participating in the most recent codB study, as it relates to typical and high-Profit Stores. the sales gap between the typical and highProfit hardware Stores widened in 2010, compared to previous years. in the most recent study, the high-Profit hardware Store eclipsed the $2 million sales mark ($2.01 million) for the first time since nrhA began compiling the study. Much of this can be attributed to these stores

ability to attract nearly a 50 percent larger customer base (117,908 vs. 80,000) than typical hardware Stores. of the 300 comp-store retailers (representing 426 stores) who participated in both the last two nrhA codB studies, year-over-year (09-10) sales and customer counts were down slightly (1.8 percent for both). Gross Margins at both the typical and high-Profit hardware Store were strong in 2010 as coGS held steady from a historical comparison. Gross Margin After rebate at the Average hardware Store was 42.1 percent of sales, while highProfit hardware Stores saw 43 percent. Both Average and high-Profit retailers also maximized their purchase rebates throughout 2010 compared to 2009 levels. For the comp-store group, however, Gross Margin (after rebate) took a nose dive year over year, falling from 42.8 percent to 40.3 percent of sales, as coGS increased more than 3.6 percentage points. total operating expenses is generally where the separation exists between typical and high-Profit hardware Stores, and 2010 was no exception, as the typical hardware Store saw total operating expenses of 41 percent compared to 37.6 percent for highProfit hardware Stores. there was no one expense category that stood out, just a little bit here and a little bit there, which added up to a differential of 3.4 percentage points. total operating expenses were also down more than 2 percentage points for the comp-store group year over year in 2010, the typical hardware Store saw 2.2 cents drop to the bottom line for every dollar in sales, which was identical to the typical hardware Store in last years study. high-Profit hardware
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2011 AnnuAl RepoRt


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Hardware Retailing

stores saw 6.2 cents fall to the bottom line for every dollar in sales, reflecting their ability to buy better, demand higher margins from customers and control expenses more effectively. For the comp-store group, bottom line profitability increased from 1.6 percent of sales to 2.1 percent year over year.

Home Centers
Sales at the typical home center in 2010 were $3.02 million, which from an overall historical perspective was down slightly from 2009 levels. Like hardware Stores in the study, the after effects of the recession and housing crisis continued to play out in 2010. the average customer count of 85,500 at the typical home center in 2010 continued to fall compared to previous years as consumers put off home remodeling projects and contractors continued to wait for the phone to ring. Also like hardware Stores in the study, however, a dominant trend seen in the home center sample was a sales polarization between typical and highProfit stores. the sales gap between the typical and high-Profit home center widened dramatically in 2010, compared to previous years. Again, keeping in mind that the sample respondent group changes from year to year, with about half of the respondent group participating year over year, high-Profit home centers reported $5.63 million in sales for fiscal year 2010, more than $2.5 million than the typical home center. Like high-Profit hardware Stores, much of this can be attributed to these stores ability to attract more customers (110,900 vs. 85,500 at the typical home center). of the 52 comp-store home center retailers (representing 205 stores) who participated in both the last two nrhA cost of doing Business Studies, year-overyear sales increased 7.3 percent while customer counts increased 15 percent. Gross Margins at both the typical and high-Profit home center in the
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2011 Study held steady from a historical comparison. Gross Margin After rebate at the Average home center was 32.7 percent of sales, while high-Profit home centers recorded a Gross Margin of 30.8 percent, reflecting their slightly higher pro to consumer customer breakdown (47 percent pro vs. 42 percent consumer sales at high-Profit home centers, with the typical home center at 42 percent pro vs. 47 percent consumer). For the comp-store home center group, Gross Margin (after rebate) increased by a half a percentage point, as coGS decreased by nearly the same amount. expense control was a key difference between typical and high-Profit home centers in 2010 equating to a difference of more than 5 percentage points. the typical home center saw total operating expenses of 31.7 percent compared to 26.6 percent for high-Profit home center. A point and a half savings in payroll expensesa half a point in occupancy expensebetter overall expense management contributed to the difference in high-Profit home centers. total operating expenses were almost a point higher for the comp-store home center group year over year in 2010, the typical home center saw a bottom line of 2.1 percent of sales, while the high-Profit home center stores saw a bottom line of 5.3 percent of sales. For the comp-store group, bottom line profitability increased from 2.2 percent of sales to 2.5 percent year over year. But overall, higher levels of profitability continue to elude most home center operators in todays under-performing economy.

LBM Outlets
Sales at the typical LBM outlet in 2011 were $2.22 million as the typical LBM outlet struggled to break even. the sales polarization between typical and high-Profit stores was also evident in this category, as sales at high-Profit LBM outlets were $4.43 million, double than that at typical stores, but still lower than

historical high-Profit LBM outlets in previous codB studies. the struggle for these stores was the elusive customer. Just 21,500 customers visited the typical LBM outlet in the study versus 25,900 for high-Profit LBM outlets. But again, even this higher level was down nearly 11,000 customers from the high-Profit group in last years study as the nations housing woes continued. one of the key differences, however, was the high-Profit groups ability to maximize each transaction, as sales per customer at high-Profit LBM outlets was $171 vs. the $103 average transaction at typical stores. this difference also reflected the different customer makeup of the typical store (68 percent pro vs. 22 percent consumer) and high-Profit stores (80 percent pro, 12 percent consumer). For the comp-store group, sales decreased 8.8 percent from 2009 to 2010. the difference in Gross Margins at typical and high-Profit LBM outlets also reflected the slightly different focus of typical and high-Profit stores. Gross Margin (after rebate) at the typical LBM outlet was 26.7 percent of sales, while gross margin at high-Profit LBM outlets was 22.2 percent. obviously, high-Profit stores are more geared to selling highturning commodity LBM products, which was also reflected in both inventory turnover and Sales to inventory differences between the two groups. For the comp-store group, however, Gross Margin (after rebate) took a nose dive year over year, falling from 42.8 percent to 40.3 percent of sales, as coGS increased more than 3.6 percentage points. in 2010, the typical LBM outlet barely made a profit, recording a bottom line of .9 percent of sales. even their high-Profit counterparts only brought 2.7 percent of sales to the bottom line. Year over year, profitability increased from -0.6 percent to 0.9 percent of sales, which further illustrated how difficult it is to turn a profit when your primary focus is selling lumber and building materials to pros.
November 2011 Hardware Retailing

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Retail Store performance


nRHA Retail Confidence panel
Panel consists of retailers across the U.S. and Canada

60% 80% 60%

60 percent of the confidence panel feels consumers are more motivated by convenience than they were 20 years ago.
2011

100% 80% 60% 40% 20% 0% 100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% 0%

Customer Count
Respondents saying customer count was up over previous period. Respondents saying customer count was down over previous period.

41.0% 29.4% 33.2% 21.1%

45.5% 41.3%

52.5%

33.2%

Source: NRHA/Hardware Retailing Confidence Panel

2011

Q1

Q2

2011

Q3

2010

Q4

2011

Q1

2011

Q2

2011

Q3

2011 AnnuAl RepoRt

80 percent of the confidence panel feels consumers are more influenced by the media (TV, Internet, Radio) than they were in the last 20 years.
2011

Sales Activity
Respondents saying sales were up in period over previous year. Respondents saying sales were down in period over previous year.

57.8% 49.8% 39.5% 37.5% 36.2% 33.6%

53.0%

18.2%
Source: NRHA/Hardware Retailing Confidence Panel

10 100 8 80 6 60 4 40 2 20

2010 2010

Q4

Q4

2011 2011

Q1

Q1

2011 2011

Q2

Q2

2011 2011

Q3

Q3

2011

Q1

Q2

2011

Q3

November 2011

60 percent of the confidence panel feels consumers are more motivated by price than they were 20 years ago.

100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% 0%

transaction Size
Respondents saying average transaction size was up over previous period. Respondents saying average transaction size was down over previous period.

68.0%

50.7%

43.3%

58.5%

25.6%

34.4%

25.8%

20.1%

Source: NRHA/Hardware Retailing Confidence Panel

2010 2010

Q4

Q4

2011 2011

Q1

Q1

2011 2011

Q2

Q2

2011 2011

Q3

Q3

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Hardware Retailing

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Financial profiles
Financial profile of Hardware Stores
operating profile
Avg. Size Selling Area (sq. ft.) Total Sales Sales per Store Total Asset Investment Total Inventory

2006
8,000 $1,157,356 $1,150,766 $573,701 $368,000

2007
9,100 $1,893,907 $1,421,740 $664,480 $436,800

2008
9,097 $1,425,296 $1,415,739 $809,795 $509,432

2009
9,000 $1,430,459 $1,413,209 $698,504* $450,000

2010
8,760 $1,330,152 $1,287,986 $687,707 $443,571

productivity profile per unit


Sales per Square Feet of Selling Area Inventory per Square Feet of Selling Area Net Sales to Total Assets Net Sales to Total Inventory Total Sales per Employee Avg. Size of Transaction

2006
$145 $46 2.0x 3.1x $136,160 $15

2007
$156 $48 2.9x 4.3x $135,404 $16

2008
$156 $56 1.8x 2.8x $149,025 $17

2009
$157 $50 2.0x 3.1x $148,759 $17

2010
$147 $51 1.9x 3.0x $143,110 $16

profitablility profile
Gross Margin Net Profit (Before Taxes) to Net Sales

2006
39.7% 2.9% 130% 10.1%

2007
39.4% 2.5% 133.3% 8.5%

2008
41% 2.6% 162.2% 8.6%

2009
39.7% 2.2% 128.5% 8.3%

2010
40.6% 2.2% 122.2% 7.8%

2011 AnnuAl RepoRt

Gross Margin Return on Inventory Return on Net Worth (Before Taxes)

Source: North American Retail Hardware Association. Figures based on responses to annual Cost of Doing Business Study. *Average of five years historical assets due to influence of response data

Income Statement 2010


Net Sales Cost of Goods Sold Gross Margin Patronage Dividend/Purchase Rebate Gross Margin Plus Purchase Rebate Total Expenses Gross Operating Profit 100% 59.4% 40.6% 1.5% 42.1% 41% 1.1% 1.1% 2.2%

Balance Sheet 2010


Current Assets Fixed Assets Total Assets Current Liabilities Long-Term Liabilities Total Liabilities Net Worth Total Liabilities and Net Worth 76.8% 23.2% 100% 15.2% 32.1% 47.3% 52.7% 100%

November 2011

Other Income Net Profit (Before Taxes)

Source: North American Retail Hardware Association. Figures based on responses to annual Cost of Doing Business Study.

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Financial profile of Home Centers


operating profile
Avg. Size Selling Area (sq. ft.) Total Sales Sales per Store Total Asset Investment Total Inventory

2006
14,000 $4,590,136 $4,179,306 $2,220,262 $1,190,000

2007
12,000 $5,635,077 $3,634,461 $1,943,465 $948,000

2008
12,000 $5,172,285 $3,847,389 $1,852,690 $985,631

2009
12,000 $4,169,156 $3,379,518 $1,823,371* $924,000

2010
10,600 $3,836,680 $3,024,520 $1,748,807 $897,137

productivity profile per unit


Sales per Square Feet of Selling Area Inventory per Square Feet of Selling Area Net Sales to Total Assets Net Sales to Total Inventory Total Sales per Employee Avg. Size of Transaction

2006
$328 $85 2.1x 3.9x $199,571 $45

2007
$303 $79 2.9x 5.9x $165,203 $35

2008
$321 $31 2.8x 5.2x $192,369 $41

2009
$282 $77 2.3x 4.5x $194,225 $38

2010
$284 $84 2.2x 3.4x $183,304 $35

profitablility profile
Gross Margin Net Profit (Before Taxes) to Net Sales Gross Margin Return on Inventory Return on Net Worth (Before Taxes)

2006
31.3% 2.8% 124.5% 9.4%

2007
35.1% 1.9% 138.9% 5.9%

2008
33.5% 1% 135.3% 9.6%

2009
31.7% 1.7% 121.1% 5.1%

2010
31.3% 2.1% 110.4% 5.5%

Source: North American Retail Hardware Association. Figures based on responses to annual Cost of Doing Business Study. *Average of five years historical assets due to influence of response data

Income Statement 2010


Net Sales Cost of Goods Sold Gross Margin Patronage Dividend/Purchase Rebate Gross Margin Plus Purchase Rebate Total Expenses Gross Operating Profit Other Income Net Profit (Before Taxes) 100% 68.7% 31.3% 1.4% 32.7% 31.7% 1.1% 1.0% 2.1%

Balance Sheet 2010


Current Assets Fixed Assets Total Assets Current Liabilities Long-Term Liabilities Total Liabilities Net Worth Total Liabilities and Net Worth 74.3% 25.7% 100% 17.2% 16.4% 33.6% 66.4% 100%

Source: North American Retail Hardware Association. Figures based on responses to annual Cost of Doing Business Study.

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45

Financial profiles
Financial profile of D-I-Y lumberyards
operating profile
Avg. Size Selling Area (sq. ft.) Total Sales Sales per Store Total Asset Investment Total Inventory

2006
7,400 $5,033,061 $4,707,751 $2,123,617 $976,800

2007
7,500 $5,088,503 $4,252,288 $1,631,225 $750,000

2008
7,200 $4,083,096 $3,022,463 $1,602,620 $852,593

2009
5,000 $3,872,256 $3,237,253 $1,370,317* $630,000

2010
6,000 $2,289,127 $2,216,316 $1,186,173 $489,889

productivity profile per unit


Sales per Square Feet of Selling Area Inventory per Square Feet of Selling Area Net Sales to Total Assets Net Sales to Total Inventory Total Sales per Employee Avg. Size of Transaction

2006
$680 $132 2.4x 5.2x $239,670 $101

2007
$567 $100 3.1x 6.8x $257,714 $105

2008
$420 $68 2.5x 4.8x $241,797 $98

2009
$647 $126 2.8x 6.1x $249,019 $127

2010
$369 $82 1.9x 4.7x $221,632 $103

profitablility profile
Gross Margin Net Profit (Before Taxes) to Net Sales

2006
25.3% 2.1% 133.4% 8.3%

2007
23.2% 1.1% 134.3% 4.4%

2008
29.3% 0.8% 185.5% 7.0%

2009
25.6% -0.2% 135.4% -0.5%

2010
25.8% 0.9% 120.8% 3.5%

2011 AnnuAl RepoRt

Gross Margin Return on Inventory Return on Net Worth (Before Taxes)

Source: North American Retail Hardware Association. Figures based on responses to annual Cost of Doing Business Study. *Average of five years historical assets due to influence of response data

Income Statement 2010


Net Sales Cost of Goods Sold Gross Margin Patronage Dividend/Purchase Rebate Gross Margin Plus Purchase Rebate Total Expenses Gross Operating Profit 100% 74.2% 25.8% 0.9% 26.7% 27.1% -0.4% 1.4% 0.9%

Balance Sheet 2010


Current Assets Fixed Assets Total Assets Current Liabilities Long-Term Liabilities Total Liabilities Net Worth Total Liabilities and Net Worth 77.1% 22.9% 100% 15% 37% 52% 48% 100%

November 2011

Other Income Net Profit (Before Taxes)

Source: North American Retail Hardware Association. Figures based on responses to annual Cost of Doing Business Study.

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Financial profiles

Financial profile of leading publicly Held D-I-Y Chains 2010


operating and productivity profile
Number of Stores (at end of 2010) Average Size of Selling Area (sq. ft.) Total Sales Total Asset Investment Total Inventory Sales Per Square Foot Inventory Turnover Net Sales to Inventory Total Sales Per Employee Average Size of Transaction Gross Margin Return on Inventory

Home Depot
2,248 105,000 $68.0 Bil. $40.13 Bil. $10.63 Bil. $288.64 4.1x 6.4x $211,838 $51.93 219.4%

lowe's Cos.
1,749 113,000 $48.82 Bil. $33.67 Bil. $8.32 Bil. $247.82 3.8x 5.9x $204,444 $62.07 205.9%

Income Statement
Net Sales Cost of Goods Sold

Home Depot
100.0% 65.7% 34.3% 25.7% 8.6%

lowe's Cos.
100.0% 64.9% 35.1% 28.5% 6.6%

2011 AnnuAl RepoRt

Gross Margin Total Operating Expenses Net Income (Before Taxes)

Balance Sheet
Total Current Assets Cash Receivables Inventory Other Fixed Assets Total Assets

Home Depot
33.6% 1.4% 2.7% 26.5% 3.1% 66.4% 100.0%

lowe's Cos.
29.6% 1.9% nA 24.7% 1.0% 71.0% 100.0%

Current Liabilities Long-Term Liabilities


November 2011

25.2% 27.7% 47.1% 100.0%

21.1% 19.4% 59.5% 100.0%

Net Worth Total Liabilities and Net Worth


Source: Company Reports and Hardware Retailing Estimates

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profile of Wholesaling Cooperatives and national Distributors


Ace Hardware Co. Number of Distrubution Centers Current Number of Members Number of Non-Member Accounts Served Dollar Volume Most Recent Fiscal Year Estimated Dollar Volume Calendar 2011 % Sales out of Warehouse % Sales Out of Pool/Relay % Sales Direct-Drop Ship % Sales in LBM Number of Employees Avg. Number of SKUs in Warehouse Sales/Inventory Ratio for 2010 2010 Member Rebate Distributed % Cash % Stock % Other
Source: Company reports

Do It Best Co. 8

true Value Co. 12 4,600 approx. 0

orgill Inc. 5 nA nA $1.179 Bil. $1.3 Bil. 71% 0% 29% 9% 1,761 71,000 6.5 nA nA nA nA

Handy Hardware Wholesale 2 1,259 21 $235 Mil. $245 Mil. 65% 1% 34% 6% 446 48,000 4.2 nA nA nA nA

united Hardware Dist. Co. 4 594 616 $179 Mil.


4

14 4,450 0 $3.53 Bil. nA 73% 0% 22% nA 4,000 approx. 80,000 nA $70 Mil. 40% 60% nA
1 Fiscal year 2010. 2 Domestic and International. 2

4,100 nA $2.41 Bil nA 38% 0% 46% 16% 1,403 67,000 5.5


5 5

$1.8 Bil. nA 72% 0% 28% 7% 2,400 approx. nA 6.4

$184 Mil. 81% 1% 18% 5% 335 51,500 5.51


3

105.8 Mil. 79% 21% 0%

nA 41% 16% 42%


3 Warehouse sales only. 4 Fiscal year end Nov. 30.

$4 Mil. 50% 50% nA

5 Fiscal year end June 25.

profile of Wholesaling Merchandising Groups


pRo Group Inc. Current Number of Wholesale Members Number Member Wholesalers End 2010 Number Member-Operated Distribution Centers Dollar Volume for 2010 Fiscal Year Estimated Dollar Volume Calendar 2011 Number of Retail Stores Served by Members Number of Program Stores Number of Employees
Source: Company reports

Distribution America 9 10 15 nA 8% increase over 2010 10,000 1,400 10

Val-test Group 100 100 104 $1 Bil.


1

Reliable Distributors 109 109 200 $2.1 Bil. $2.1 Bil. 20,000 nA 9

30 31 40 $3 Bil. $3 Bil. 35,000 800 22

$1 Bil. 2,000 500 12

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November 2011 Hardware Retailing

49

Housing trends

Homebuyers Still Watching


High Unemployment, Timid Consumers Keep Housing Market on the Sideline
istorically, when the economy takes a hard fall, housing has thrown the winning pass that gets the team back on its feet. this time around, however, our star athlete seems to have been seriously injured in the fray. Sitting on the sidelines, the housing market seems overpowered by high unemployment, timid consumers and weak home prices. Anyone paying much attention to the game this time around will see a lot of mixed signals. throughout the first half of 2011, retail sales generally trended upward, employment growth was better than 2010 and houses continued to get more affordable. Potential homebuyers refused to come out for the game, however, as new home sales reached record lows and existing home sales stayed depressed. Meanwhile, the rental market has been getting stronger. So is the housing market ready to play again or will it stay in recovery mode for a while?

surface. how the potential homebuyer has fared over the past year coupled with the challenges for the coming year has a lot to say about how the housing market will affect the home improvement market in the coming months.

Why Buy When You Can Rent?


the national homeownership rate continues to drop, one of the largest declines in decades. that, in turn, has led to a steady rise in rental rates. not only are fewer renters taking the next step to buy their first home, more and more owners are becoming renters. of course, the foreclosure crisis has had a big impact on who owns a home these days, but it hasnt completely crashed the appeal of homeownership. According to the Fannie Mae national housing Survey for the second quarter 2011, respondents continue to cite nonfinancial reasonssuch as having a good place to raise children, or having a place where they feel safe, or having control over living spaceas more important than the financial reasons for buying a home. Still, while the majority of renters admit that owning a home makes more sense than renting, 53 percent say they would continue renting if they were to move, according to the survey. this is a double-edged sword for home improvement retailers. new homeowners tend to spend more on improvements. According to harvard Universitys Joint center for housing Studies, homeowners spend nearly three times as much on home improvement during the first two years of homeownership than during other times. Fewer new homeowners may eliminate some home improvement spending. however, landlords will be busier with more tenants, and theyll

2011 AnnuAl RepoRt

be doing maintenance and repair. this creates a good opportunity for retailers to strengthen sales with rental managers and to expand the selection of products they typically stock. in addition, investors and homeowners alike may be waiting for good deals on distressed properties. once purchased, those distressed properties will likely have a few years of deferred maintenance to repair. the home improvement research institute estimates those who buy a distressed property will spend about 14 percent more on improvements in the first year than those who buy a nondistressed property. Another positive sign: A strengthening rental market has been lifting multifamily housing production. the national Association of home Builders (nAhB) reports the Multifamily Production index (MPi) rose for the fourth consecutive quarter to the highest mark since 2006, indicating an improving market in that sector.

Home Improvement Retailers Adapt to New Reality


instead of loading up boom trucks with whole-house packages, or helping customers design a set of custom cabinets, retailers are selling customers smaller projects and helping them repair and maintain the homes they already have. the bottom line is that the overall economy continues to hurt home sales, and recovery seems slow and tedious. Making sense of it all is confusing at best. while most can accept the fact that the new housing market may never reach the same dramatic heights it had in the late 1990s and early 2000s, everyone would like to think theres a lot of pent up demand out there that sooner or later will bubble to the
Hardware Retailing

Who Will Buy that Home?


what will it take to turn renters into homeowners? if ever there was a hypothetical time to buy, it is now as housing affordability has reached near record levels. According to the nAhB, housing affordability during the second quarter of 2011 was at its highest level in 20 years, and its been that way for 10 consecutive quarters. But housing affordability doesnt mean much to someone who doesnt have a job. while unemployment numbers have stayed below last years numbers, a lot of people are still out of work and others arent making as much money as they used to. that may still be the biggest factor hindering housing growth. But unemployment combined
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November 2011

Multifamily production Index*


70 60 50 40 30 20 10
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
For Sale For Rent (Market Rent) For Rent (low Rent)

2009

2009

2009

2009

2010

2010

2010

2010

2011

2011

*The Multifamily Index is one of the leading indicators measuring confidence developers have in the multi-family market. Any number over 50 indicates that more respondents report conditions are improving than those who report conditions are getting worse.
Source: National Association of Home Builders

with an overall uneasiness about the economy and the fact that banks have tightened lending restrictions results in a market that, despite affordability, isnt as inviting as it could be to prospective home owners. changing demographics will also likely play a key role in the shape of the housing market, as well as what those consumers look for from home improvement retailers. Baby boomers continue to dominate the housing market now and will continue to over the next decade. According to the harvard Universitys State of the nations housing report, households headed by persons 65 or older will jump 35 percent from 2010 to 2020. As they retire, some of them will move into housing developments with both independent and assisted living options. others may choose to retire in their current homes, but some will downsize to a smaller home. Smaller homes tend to be the first choice for young families as well. As a result, the coming years could see a greater demand for those smaller-sized houses. the younger generations, however, also will need to form new households in order for the housing market to
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take off again. According to statistics reported by the 2010 decennial census, household growth was 17 percent lower in the 2000s than it was in the 1990s. Some of that decline in household growth can be attributed to the recession, some of it to social factors, like a growing minority population and the fact that more young adults are choosing to stay with their parents later in life instead of moving out on their own.

How Well Buy that Home


Much depends on what happens in washington. in 2010, the housing market got some lift from the Federal government, which was wrapping up its First-time homebuyers tax credit. Government regulators are also trying to correct some of the problems that started this housing crisis in the first place. FhA-insured mortgage programs are still the easiest entry point for moderate-income homebuyers, but the FhA and others have been raising mortgage insurance premiums and are more cautious of borrowers with low credit scores. its not as easy to buy a house as it used to be. those that do own a home arent able to cash in on their equity like they used

to. According to the State of the nations housing 2011 report, after housing prices plummeted, nearly 15 percent of homeowners had properties worth less than their mortgages. Plenty of others saw their hard-earned equity erode, which means they no longer had access to cash to make improvements to their homes. to help, the obama administration extended the home Affordable refinance Program (hArP) through June 30, 2012. this program helps borrowers refinance up to 125 percent of their homes value, as long as their income will support the loan. the program also allows homeowners to refinance and not pay mortgage insurance, even if their equity falls below 20 percent. consumers are waiting for some stability before they stop watching the market and start acting. when they do act, expect that pent up demand to quickly eat through the supply of unsold homes on the market. in the meantime, retailers are well advised to strengthen their ties with do-ityourself consumers looking to save money while improving their homes, and with property managers, who may have their hands full with more renters on the market.
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51

Housing trends

Housing Affordability
Median-priced existing SingleFamily Home 2008 2009 2010 Aug. 2011 (p) $196,600 $172,100 $173,100 $168,400 Mortgage Rate 1 6.15 5.14 4.89 4.69 Monthly p&I payment $958 $751 $734 $698 payment as % Income 18.5% 14.8% 14.4% 13.6% Median Family Income $62,030 $61,082 $61,313 $61,553 Qualifying Income 2 Composite Affordability Index 3

$45,984 $36,048 $35,232 $33,504

137.8 169.4 174.0 183.7

1 Effective rate on loans closed on existing homes. Federal Housing Finance Board

2 Based on a 25% qualifying ratio for monthly housing expense to gross monthly income with a 20% down payment.

3 Index equals 100 when median family income equals qualifying income.

Source: National Association of Realtors

Housing Statistics By Region


new Single-Family Homes Sold (thousands of homes)
Year 2007 2008 2009 total u.S. 776 485 356 331 northeast 65 35 38 22 Midwest 118 70 51 38 South 411 266 184 168 West 181 114 83 103

2011 AnnuAl RepoRt

2010 Aug. 2011 (p)*

295

19

53

164

59

existing Single-Family Homes Sold (thousands of homes)


Year 2008 2009 2010 Aug. 2011 (p)* total u.S. northeast Midwest South West

4,913 5,156 4,907 5,030

849 868 817 770

1,129 1,163 1,076 1,090

1,865 1,914 1,860 1,940

1,070 1,211 1,154 1,230

Housing Starts (thousands of homes)


Year 2007 2008 2009 total u.S. northeast Midwest South West

1,355 906 554 587 571

143 121 62 72 61

210 135 97 98 80

682 454 278 298 292

320 196 117 120 138

November 2011

2010 Aug. 2011 (p)*


Source: U.S. Department of Commerce *Seasonally adjusted annual rate

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