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Not So Quiet on the Home Improvement Front

Lowe's and Home Depot may be down, but there's money to be made in home improvement.

Another day, another depressing housing-related headline.

This time, the bad news came from the country's largest home-improvement retailers.

Home Depot

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reported their first-quarter earnings this week, and in both cases, the report was grim.

But look beyond the major companies and you'll find some surprisingly good news. It turns out that small businesses specializing in home services may be doing better than the big guys.

At Home Depot, net earnings fell a staggering 66%, although about half that was due to a one-time charge of $543 million to close 15 stores and halt plans to build 50 more. Without the charge, earnings were still down about 30%, and sales at stores open at least a year fell 6.5%.

With fewer people selling their houses and moving, fewer customers have been showing up at Home Depot for paint, window shades and other new-home necessities. "The housing and home improvement markets remained difficult in the first quarter; in fact, conditions worsened in many areas of the country," said Chairman and CEO Frank Blake, in a statement.

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The news at Lowe's was slightly better, but not by much. First-quarter profit fell 18%, and same-store sales dropped 8%. Lowe's chairman and CEO Robert A. Niblock had a similar explanation for the company's woes: "The generally poor economic outlook, including well-known housing pressures, rising food and fuel prices and a more negative employment picture eroded consumer confidence and impacted discretionary purchases for the home."

If the news is this bad at the country's biggest home-products retailers, it must be disastrous for the entire home improvement industry, right?

Not necessarily.

Finding the Right Customers

"Based on current projections, I'm going to have my best year ever," says contractor William Carter, vice president of the board of the National Association of the Remodeling Industry. Carter, who has run his own contracting business in Sacramento, Calif., for 35 years, says plenty of people are willing to invest in their houses -- you just have to know who they are.

"The Baby Boomers still have that money to spend on their homes," says Carter. "The dollar isn't going as far as it used to, but if you put money into fixing up your house, it's an investment that has an assured return and value."

Home Depot and Lowe's target money-conscious, do-it-yourself consumers -- the very people who are most likely struggling now to afford $4-a-gallon gas. In tough economic times, they're the ones who will put off heading to their local home-improvement store for luxuries like limestone countertops or expensive bathroom faucets.

But that leaves a whole network of potential clients who can still afford to hire professionals. A few years ago, if these higher-income clients were dissatisfied with their houses, they'd pick up and move. Now, stuck in a house that won't sell, they're more likely to change what they don't like, investing in upgrades such as room additions or new kitchens. That means contractors and other home-repair specialists may find themselves more in demand than ever.

Market Your Biz

While Baby Boomers are a prime demographic, Carter says home-improvement companies also have to appeal to younger, design-conscious clients with attractive Web sites and up-to-date logos. "It's a way to rise above the others," he says. "You have to keep your name out there, so you'll be in the forefront when the economy cycles back around," he says.

If possible, your own home can be used as a successful sales strategy. If you've tried out a cool new technology or service in your own house, invite potential clients over to take a look. "My house is a huge sales point for me," says Carter. "It lets clients know what's available, and shows them that it's within their reach."

Even though there's still money to be made from houses, grabbing a piece of it won't be easy in this competitive market. Some smaller, less experienced companies may crumble under the pressure. But convincing homeowners to invest in their dwelling isn't impossible -- as long as you can show them why it makes sense.

Elizabeth Blackwell is a freelance writer based in Chicago. She is the author of Frommer's Chicago guidebook, and writes for the Wall Street Journal, Chicago, and other national magazines.