John Caulfield, Contributing Editor
 vol. ix, #37 September 29, 2003

* Hardware stores lose market share, building centres gain slightly * Home Hardware debates value of a Sodisco-Howden acquisition * Home Depot announces second Manhattan location * Georgia-Pacific wants out of commodity business * Gift cards generate strong impulse sales for independents * Canadian Tire opens first Budget car rental kiosk * Builders Firstsource to exit Denver market

"We work to become, not to acquire." — Elbert Hubbard (American writer, 1856-1915)
ST. JACOBS, ON — News that Sodisco-Howden Group might be up for sale has not gone unnoticed at Home Hardware Stores. But would they want to buy the publicly traded hardware and LBM distributor? "We'd look at any opportunity if there was a means of helping the independent dealer and if this was the right fit," says Paul Straus, vice-president and CEO of Home Hardware. But added that his company is in no talks with Sodisco-Howden right now. Speculation is running wild right now on the announcement that Sodisco-Howden had hired a M&A firm, NM Rothschild & Sons, to advise on the future of the company. Home would be one of a handful of competitors in a position to buy Sodisco-Howden's operations, which include three distribution centres, one in Victoriaville, QC, one in London, ON and the other in Langley, BC. But there are a lot of reasons why a buyout wouldn't be a good fit, Straus goes on to explain. For example, with all the acquisitions Sodisco-Howden has made in recent years, it's yet to harmonize computers and systems. "It would be complicated," Straus says.
TORONTO — Sales by hardware stores are down. And so is their market share. While many individual dealers have shown strong growth, overall sales by this group of retailers declined 11% in 2002, says a new study in the Hardlines Quarterly Report. According to the study, which evaluates the size of the retail home improvement market and relative growth of the market by retail type, sales by hardware retailers in Canada have dropped from 13.6% of the overall market in 2001 to 12.1% of the market in 2002. That's an 11% drop in sales, and a loss of 3.2% of market share. Building centres, however, showed a slight increase, with their overall share of the retail home improvement industry rising 2.4% from 46.6% to 47.7%. Hardware and home improvement sales grew by more than 8% in 2002 and represented almost one in 10 dollars spent by Canadians at retail last year. Hardware and building supply dealers, mainly represented by independents, account for almost 60% of that industry. Their growth has been attributed to the performance of fewer, but stronger, players as they expand square footage, locations and services.
ST. JACOBS, ON — One of the services that garnered a lot of attention at the recent Home Hardware Spring Market was Home's new gift card. The card, which can be loaded at POS with any amount desired, was designed to replace gift certificates, which the company claims were awkward and difficult to track. Gift cards have been great for impulse sales, as well, and sales through a limited number of stores have been going through the roof. "We matched what we did in gift certificates annually in just two months," says Bill Ferguson, dealer support manager at Home Hardware. The card has an added sales dimension when sold in bulk at a discount to a script company – in effect, a jobber that resells the cards to charitable or fund-raising organizations. The script company keeps some of the discount and passes along the rest to the fund-raisers, who can in turn sell the cards to raise money for their own causes. According to Ferguson, the gift card business in the U.S. is worth $36 billion annually.
ATLANTA, GA — Georgia-Pacific wants to unload its building products distribution division in favour of concentrating more on consumer products such as paper towels and toilet tissue. So it has hired Goldman Sachs as its financial adviser. The division, which had sales last year of US$3.77 billion, distributes more than 10,000 products in 14 categories, including structural panels, hardwood plywood, roofing, lumber, vinyl siding and particleboard. A separate division from Georgia-Pacific's building products manufacturing operations, it employs 3,390 people in 63 facilities in the U.S. and one in Canada. But GP wants to move out of commodity based businesses. Even though it is an industry leader in LBM distribution, it purchases less than 30% of its supply from GP's own manufacturing facilities. Distribution in the LBM sector is typically at the mercy of pricing changes, and recently the industry has been assailed by volatile prices for plywood and OSB. GP's board wants to "create shareholder value by sharpening focus on Georgia-Pacific's more stable, consumer-oriented businesses and our goals of reducing debt and strengthening our balance sheet, it is natural that we fully review the strategic alternatives for the building products distribution business," said Pete Correll, Georgia-Pacific chairman and CEO in a prepared statement.
DALLAS — Four years after entering Denver, Builders FirstSource, the ninth-largest home improvement dealer in the U.S., has suddenly decided to exit that market after having little success expanding its initial penetration. In July 1999, BFS acquired Kellogg Lumber, whose two yards and manufacturing plant were generating US$47 million in annual sales. However, a combination of factors, including acquisitions in the Denver market by Stock Building Supply and Lanoga Corp., and a 14% decline in home building activity over the past three years, stymied BFS's efforts to grow in Colorado. "We have been the number-seven competitor in the market, which has made it difficult for us to respond profitably to the business downturn," said Floyd Sherman, BFS's chairman and CEO, in a prepared statement. The pro dealer has decided to close its store in Denver (whose lease expired this summer), and to sell its store in Fountain, CO, to a buyer whose identity the company did not disclose. Michael Turner, a principal with The Jian Group, a Fredericksburg, VA-based broker that helps many of the industry's large pro dealers find suitable acquisition targets, told Hardlines that he expected BFS to step up purchasing in 2004, when it would concentrate on companies that offered value -added services like truss and panel manufacturing, and installation for home builders.
NEW YORK — Home Depot has announced a second location for the Manhattan market. The latest is a store at 59th Street and Third Avenue in Midtown Manhattan, which is expected to be open by next summer.Two weeks ago, the retailer announced plans to open its first store, in Manhattan's Flatiron District, also next summer. When these stores open, Home Depot will have 17 locations throughout all five of New York City's boroughs. Right now Home Depot has 78 stores in the greater New York market. "Home Depot has been evaluating locations throughout Manhattan for several years," said Tom Taylor, president of Home Depot's Eastern Division, in a prepared release. Both stores will be pedestrian-oriented, multiple-level "urban neighbourhood" stores, with a product assortment geared specifically for the downtown market. While the latest store will be about 83,000 sq.ft. in size, the Flatiron store will be considerably larger, a 108,000 sq.ft. outlet with two floors and a mezzanine. Since the urban neighbourhood format was launched in April 2002, the company has opened urban stores in Brooklyn and Staten Island, NY, and in Chicago.
FORT WORTH, TX — The board of directors of Calloway's Nursery, the ninth-largest lawn and garden specialty dealer in the U.S., unanimously approved a plan to buy back the company's common stock and take this dealer private. The move is expected to save the company about US$500,000 annually.Calloway's was founded in 1986 and ended 2002 with 26 stores and US$43.3 million in revenue. On Sept. 18, it filed a Schedule 13-E-3 with the U.S. Securities and Exchange Commission. That document stated that Calloway's would enter into a series of stock repurchase transactions with several individual shareholders, to the point where its common shares would no longer be traded publicly. Jim Estill, Calloway's chairman, president and CEO, controls 17.8% of the company's common stock. All told, the company's 11 officers and executive directors hold 36.7% of its stock. When its repurchase plans were revealed, trading of Calloway's shares on the Nasdaq SmallCap Market was halted at 62 cents, compared with $2.88 per share it traded for, on average, in the first quarter of 1998, which represented a five-year high.
Canadian Tire 37.29 26.80 36.09
Canfor 10.95 6.83 9.90
Costco 39.02 27.00 31.20
Goodfellow 12.50 9.75 11.11
Home Depot 34.99 20.10 31.98
Hudson's Bay 10.50 5.87 9.50
Lowe's Cos. 55.90 33.37 52.64
Rona Inc. 22.10 11.75 21.10
Sears Canada 20.00 13.60 18.10
Sodisco-Howden 3.35 1.15 3.00
Taiga Forest 8.10 5.85 6.90
Wal-Mart 60.20 46.25 56.80
West Fraser 39.05 26.27 35.99
TORONTO — Hudson's Bay Co. did a dog-and-pony show for the investment community last week, during which it announced details of a strategic plan to accelerate the company's sales growth over the next five years. By 2008, Hbc is targeting $9.0 billion in sales and revenue and $2.85 in earnings per share, three times the level of expected earnings per share in 2003. In a move that's reminiscent of Target, Hbc is positioning itself between high-end retailers such as Holt Renfrew and the mid-range offering of Sears. TORONTO — Budget Canada opened its first rental kiosk in a Canadian Tire store this past weekend, with an opening in Pickering, ON. The move is part of a five-year agreement signed back in February 2002 between Canadian Tire and Budget, which will involve the installation of kiosks in up to 100 Canadian Tire stores by the end of next year. EAU CLAIRE, WI — John Menard Jr., the secretive head of the world's fourth largest home improvement retailer, is getting more trouble from the Internal Revenue Service than he is from Home Depot. The debt-free chain of 184 stores in the U.S. Midwest had sales of US$5.5 billion last year, but Menard's own package pays him so lavishly that the IRS says he owes big time. RALEIGH, NC — Stock Building Supply plans to open an 89,000-sq.ft. lumber distribution centre in Scertz, TX this fall. The facility, which will employ 100 people, will eventually be expanded to supply trusses and other building materials. It will complement an existing millwork operation that Stock acquired early this year when it bought Wenco Distribution from Jeld-Wen. The company operates 16 other yards and value-added facilities in Texas. TORONTO — Hudson's Bay Co. opened its 34th Home Outfitters store last week, this one in Halifax, NS. The new 34,000-sq.ft. outlet employs 60 and is the first Home Outfitters store in the Maritimes. MARGATE, FL — Florida's first Home Depot Floor Store opened here last week. Aimed at both homeowners and pros, the 25,000-sq.ft. store features carpet, ceramic tile, natural stone, rugs, wood, vinyl and laminates, as well as installation tools. It also features a design showroom for decorators, designers, builders, remodelers, contractors and architects. TORONTO — Sears Canada has forged an agreement in principal to open a store in the Bower Place Shopping Centre in Red Deer, AB, although no opening date has been announced. The new location, in the city's developing south-end retail hub, will replace a store in Red Deer Centre. TORONTO — Carina Furniture Industries is being taken over by Montreal-based Dorel Industries. Carina is a leading RTA furniture maker, with sales of $81.4 million. The deal will make Dorel the number-two RTA furniture producer in North America. Carina designs and manufactures furniture under the Carina and SystemBuild brands, which are sold to the likes of Lowe's, OfficeMax, Staples, Home Depot, Home Hardware and Wal-Mart Canada. SAN FRANCISCO, CA — A sexual discrimination lawsuit could end up costing retail giant Wal-Mart hundreds of millions of dollars in payouts to female employees. The suit, launched two years ago by six female ex-employees, had hearings last week to establish whether the suit can be certified. Claims have been made that Wal-Mart routinely sidelines women into jobs such as cashier, which offer little chance for promotion. The lawsuit notes that 70% of Wal-Mart staff are women, while only 15% hold management positions. the judge in the case has yet to rule on whether the case can be elevated to class-action status, which could end up including 1.5 million current and former female employees. Wal-Mart is currently defending itself against 6,649 lawsuits.

Robert Lawton has been appointed director — commercial sales for Dimplex North America Ltd. Reporting to Martyn Champ, president of Dimplex, Lawton will assume responsibilities for the management, direction and planning of sales functions for the company related to its Chromalox and Electromode brands. Lawton's background includes senior sales and marketing positions with Home Depot Canada, Nutone Canada and General Electric. (519-650-3630)

With the departure of its top hardlines merchant, Sears, Roebuck & Co. is losing the last of its old guard. Lyle Heidemann, 58, executive vice-president and general manager of hardlines, has announced he will leave at the end of the year, working through this fall to ease the transition for a replacement. Tina Settecase, vice-president and general manager of appliances, is considered by some as a possible successor. The film crews were in Atlanta to make TV stars out of Home Depot's founders. Bernie Marcus and Arthur Blank will figure prominently in a film history that will appear on the "Biography" series, part of the A&E Network. The entertainment network and ABC News were in Atlanta last week to film a history of Home Depot, the home improvement chain Blank and Marcus started in the late 1970s. A&E will air the Home Depot history beginning November 19.
Inflation fell to its lowest level in over a year in August, as the national rate of inflation dropped to 2% from the 2.2% annual rate in July, says Statistics Canada. Inflation hit a high of 4.6% back in February. Meanwhile, retail sales were up 0.8% from June to July, rising to $26.6 billion, but only due to automotive sales. By excluding sales by motor and recreational vehicle dealers, the largest component of the automotive sector, retail sales actually fell 0.4% in July. The composite leading index grew 0.5% in August, the second monthly gain at this rate, making July and August the two best monthly increases in over a year, according to Stats Canada. Manufacturing continued to weaken, though, notably as the workweek was reduced by the blackout in Ontario. Excluding this, the overall index rose 0.8%, the largest since May 2002. Housing was up for the fourth straight month, with housing starts rising in July due to strong demand. Sales of new houses in the U.S. reached 1.15 million seasonally adjusted, says the Commerce Department. That's up 3.4% from the July rate of 1.12 million seasonally adjusted, and a 12.2% gain from August 2002.
The Canadian Hardware & Housewares Manufacturers Association will host its second annual Parkinson's Golf Day with proceeds to the Parkinson's Society in the name of Ed Barnes. It's on October 8 at Angus Glen, with an 11 a.m. shotgun start. Golf and dinner: $175; dinner only: $60. Contact Vaughn Crofford at the CHHMA for more info: 416-282-0022, ext. 30; or Peter Stojanov at 905-829-9496.

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