The pandemic home-improvement craze isn’t necessarily over, but it is evolving into a new phase.
There are some signs this is happening: Emerson Electric Co. said rising costs and greater spending on services were weighing on retail purchases of tools and home products, and Stanley Black & Decker Inc. took a more conservative view of sales volumes for the rest of the year in its tool and lawnmower business because of fresh price increases. Spending at home-improvement stores declined 7.3% in the week ending April 30 compared with activity in the same period a year earlier, and furniture purchases were down about 12%, according to Bank of America Corp. credit and debit card data. On the other hand, spending in both categories remains up nearly 30% compared with to 2019 levels. Sales continued to increase at downright robust rates in the first quarter at pool-product distributors and manufacturers, leading Pool Corp. and Pentair Plc to raise elements of their full-year guidance.
There was no significant drop-off in purchases of residential heating, ventilation and air conditioning (HVAC) systems, either. “I know there is sort of this general anxiety about residential, and the best that we can do is stay completely tied in with our channel partners to see what they’re seeing,” Carrier Global Corp. Chief Executive Officer Dave Gitlin said on the company’s earnings call last month. “What they’re seeing is generally a strong consumer. The same trends that drove 10% growth two years ago, drove 20% growth last year, drove north of 20% in the first quarter, generally continue.”
Air-conditioning systems and swimming pools are big investments, particularly compared with a one-off purchase of a drill or a saw, and that makes this divergence in commentary particularly interesting. Typically, if the consumer was truly suffering, spending on big ticket, discretionary items would fall first. There may be a couple different things going on here. One is that as the world has opened back up, consumers are still renovating their homes, and wealthier ones in particular have the balance sheets to do it, but they’re less interested in performing the work themselves.
“We’ve seen a step up in the ‘do-it-for-me’ category — the contractor, the professional install side of the business,” Kevin Murphy, CEO of Ferguson Plc, a $26 billion distributor of plumbing and HVAC products, said in an interview this week. “Do-it-yourself” spending as measured through the company’s residential digital commerce business remains strong, but the momentum of growth has shifted, he said. Murphy attributes this in part to an improvement in the availability of skilled trade labor. There may also be a simpler explanation: When restaurants were shut down, travel was virtually nonexistent and concerts and sporting events seemed like a relic of the past, consumers had a lot more time and energy to devote to projects around the house. Now, they would rather pay someone else to take on that burden. The easier projects that consumers were capable of handling themselves may also have already been completed, and most people now feel more comfortable letting strangers in their house.
DIY sales in Sherwin-Williams Co.’s Americas segment fell by a double-digit percentage in the first quarter — a reflection of tough comparisons to the growth a year earlier and a deliberate decision to prioritize professional customers amid raw material shortages. Wells Fargo & Co. analyst Zachary Fadem estimates foot traffic fell 18% combined at Home Depot Inc. and Lowe’s Cos. in the first quarter but said this most likely reflects a slowdown in DIY consumer demand and unseasonably cold weather this spring, with those trends offset in part by robust professional spending. The two home-improvement retailers report earnings next week.
Pools and HVAC systems are the kinds of projects that require professional assistance, and fixes aren’t as discretionary as they might appear at first blush. Consumers have been running their HVAC systems more frequently, partly because they’re around a lot more and partly because climate change has caused a greater need for heating and cooling assistance. This drives increased repair and replacement activity. When the furnace stops working in the dead of winter or the air conditioner falters in July, that sure doesn’t feel like an optional splurge. When it comes to maintaining existing pools, “you don’t want to turn it into a new pond,” Pentair CEO John Stauch said on the company’s April earnings call.
Overall, growth in consumer spending on US building products will slow to about 2.6% in 2022 and 2.8% in 2023, steadying at a healthy level after double-digit gains in 2020 and 2021, according to a market outlook published by the Home Improvement Research Institute in April. Professional demand, by contrast, is expected to grow 7.9% this year and average around 4.8% growth between 2024 and 2026. These are nominal growth rates, so inflation is helping to provide some of the momentum. The data is focused on residential remodels as opposed to new construction. “This projection highlights a significant rise in contractor activity as well as an overall continued interest in home improvement in the coming years,” the report said. Elevated home prices are limiting consumers’ ability to upgrade to a new space, and many are choosing to invest in the residence they have instead, Matt Craig, director of research at HIRI, said in an interview. Even if rising interest rates kneecap turnover rates, there’s often a three to four year lag between when people buy a home and when they remodel, meaning a good chunk of the renovation spending tied to this recent wave of purchases is likely still to come, Craig said.
Taking a step back, these trends suggest a divergence may be brewing between consumer spending trends and the housing market. This is a weird concept. But consumers have been spending heavily on all kinds of things at the retail level over the past two years, fueled in part by stimulus checks. It’s possible they have gone a bit too far and will dial that back in the face of rising prices. Almost a quarter of post-pandemic inflation is in housing, however, according to estimates from Melius Research. The solution for fixing that upward spiral in prices is to build more homes — something the US didn’t do much of in the years after the bursting of the housing bubble in the financial crisis and has struggled to do recently because of supply chain challenges. Melius analyst Rob Wertheimer estimates the undersupply of homes will linger for eight more years at the current build rate.
“We think 15 years of housing underinvestment, eight years of supply deficit built up, means housing should be strong almost no matter what, and new pools with it,” Wertheimer wrote in a recent report. “At the same time, the move in consumer retail sales that have broken far, far out of a 30-year trend line in spending is one that has to normalize.”
“You need to have it — it’s kind of like serving water and coffee.” — Don Buchman, vice president of commercial mobility at Wi-Fi provider Viasat Inc.
Buchman made the comments in an interview with Bloomberg News after Southwest Airlines Co. announced a deal with Viasat to provide better Wi-Fi capabilities on new aircraft deliveries beginning this fall. Southwest will also upgrade internet connections on its existing fleet through current partner Anuvu, with about 50 planes already converted to faster speeds. Airlines are increasingly striking deals to provide more reliable Wi-Fi for passengers with the aim of making the experience as seamless as it is in their homes. It’s part of a broader trend of investing in customers’ in-flight experience. Southwest is also adding USB chargers at every seat on Boeing Co. 737 Max aircraft, larger overhead bins and more free movies. United Airlines Holdings Inc. last year announced an overhaul that will outfit all of its mainline, single-aisle jets with seat-back in-flight entertainment, better Wi-Fi connections and enough overhead bin space for each passenger to carry on a roller bag. Most carriers have also kept pandemic-era policies for flight changes and cancellations, giving passengers much more flexibility.
As I wrote last June when United announced its plan to revamp its fleet, the pandemic was a harsh reminder for the airlines that they are in fact a customer-facing business. The more than $50 billion in payroll aid provided to the airlines by U.S. taxpayers makes returning to former practices of cramming passengers in like sardines and slapping them with rising fees a particularly tough look. With the business travel recovery still lagging, competition for premium leisure travelers is leading to a new era for airplane comforts. It’s encouraging to see this trend is holding up even as inflation pushes airline fares above pre-pandemic levels. The increase in ticket prices last month was the biggest on record since the Bureau of Labor Statistics started tracking the category in 1963.
Deals, Activists and Corporate Governance
Dover Corp. agreed to buy Malema Engineering Corp., a maker of high-precision flow-measurement tools for the biopharmaceutical and semiconductor industries, for up to $275 million. The purchase price includes $225 million in cash upfront, plus an additional $50 million if the acquired business hits certain financial targets over the next two years. Malema’s products complement Dover’s existing single-use pump business, which has boomed during the pandemic and should continue to benefit from the development of non-Covid mRNA vaccines, biologic drugs and cell and gene therapies. The initial cash payment is about 5.3 times Malema’s expected revenue this year, so this is not a particularly cheap acquisition. But valuations in that ballpark aren’t unusual for the biopharmaceutical sector. RBC analyst Deane Dray notes that it’s impressive Dover was able to get a deal signed at all amid the recent market volatility. Prologis Inc., the warehouse landlord, went public this week with a takeover bid for industrial real estate company Duke Realty Corp. after months of attempted negotiations behind the scenes that led nowhere. Prologis’s latest offer for a stock swap valued Duke shares at about $62 each, an equity value of about $24 billion, based on Monday trading levels. Duke rejected that proposal as “insufficient.” Warehouses have been a hot asset amid the pandemic boom in e-commerce, and prices have soared for scarce space, but there’s some question of how much more growth is left in this corner of the real estate market. Amazon.com Inc. spooked investors recently when it warned it had added more warehouse and labor capacity than merited by e-commerce demand in the first few months of 2022. That casts Duke’s decision to turn down Prologis’s offer in an interesting light.
The all-stock proposal has lost some of its value in recent days as Prologis shares slumped amid a broader market selloff, but its initial face value wasn’t that far off from Duke’s record close on Dec. 31. The stock was down almost 30% this year before news of Prologis’s bid. Still, Truist analyst Ki Bin Kim said there’s a limit to how much Prologis might be willing to pay before it gives away the cost saving benefits of the deal; he placed the odds of a transaction closing at less than 50%. Gol Linhas Aereas Inteligentes SA, the Brazilian airline, agreed to combine with Colombia’s Avianca Group International Ltd. under a holding company structure to form a Latin American powerhouse. The airlines will continue to operate independently and maintain separate brands but will benefit from a bigger balance sheet, cost savings from greater economies of scale and the ability to offer customers access to more destinations and flights. The new closely held ownership company will be called Abra Group Ltd. and will be incorporated in the UK. The group has lined up an additional $350 million in investments from various financial backers upon closing of the transaction, which is expected to happen in the second half of this year. Roper Technologies Inc. is nearing a deal to sell its process-technologies division to private equity firm Clayton, Dubilier & Rice for as much as $3 billion, people familiar with the matter told Bloomberg News. Roper could maintain a stake in the business as part of the transaction. The process-technologies unit represents the bulk of what’s left of Roper’s industrial past after a two-decade acquisition spree focused on niche software assets. The legacy industrial and energy operations have been the odd men out for a while now, but they are still good businesses with high margins. Brian Jellison, Roper’s former CEO and the architect of its transformation, was reluctant to sell the process-technologies business in part because a divestiture would carry a steep tax bill, but his successor, Neil Hunn, has proved much more willing to part with assets if the price is right. Roper agreed last year to sell its TransCore tolling business to Singapore Technologies Engineering Ltd. for $2.7 billion.
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Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. A former M&A reporter for Bloomberg News, she writes the Industrial Strength newsletter.
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