Retail Top 100: While most of the top 100 retailers are posting gains this year, they anticipate a lull in 2023 - November 2022

By Darius Helm and Jennifer Bardoner

It’s been a wild ride for flooring retailers over the last couple of years. Low interest rates, stay-at-home impacts and Covid stimulus funds helped drive huge growth in the residential flooring market, but everything started to change after the first quarter of 2022, and retailers are feeling the impact.

The general consensus among retailers and industry experts is that the residential remodel sector will be flat to down at the close of 2022, multifamily will be up a few points, and single-family builder business, while slowing, will still be the strongest segment. However, as market leaders, retailers on the Top 100 list outperform the field, and most show gains well above the market average.

STATE OF THE MARKET
Headwinds of the last two years have been replaced by new headwinds. Supply chain constraints, rising floorcovering prices and labor issues have slowed the growth rate since 2020. And while labor is still a problem, issues of supply have largely been resolved. Container prices have dropped back down, domestic trucking constraints have eased, and the ports are gradually starting to clear. But now, interest rates are shooting up, putting the brakes on economic growth, and inflation is impacting the entire U.S. market. Russia’s invasion of Ukraine has destabilized Europe’s supply of diesel fuel (Ukraine and Russia refine diesel for that market), increasing European demand for U.S. diesel.

In terms of the residential remodel market, store traffic among flooring retailers has been trending down since the spring. One reason is uncertainty about the economy, which seems to be leading homeowners to hold off on home improvement projects, but that’s on top of the fact that we’re just coming out of a huge wave of residential remodeling. Retailers’ flooring business relies on a steady stream of remodeling projects, and that stream is steady because homeowners are all on their own cycles, based on their needs, their finances, the year of their last remodel and even the type of flooring they use-for instance, carpet cycles are shorter than hard surface cycles. But the pandemic upended that rhythm.

The focus on the home environment during the stay-at-home months of 2020, the abrupt need to remodel to manage working at home and, for a time, children schooling from home, and, importantly, the stimulus checks that, for those who didn’t suffer job losses, provided an infusion of cash looking for an outlet-all of these events conspired to synchronize the remodeling cycle of a huge chunk of U.S. homeowners. While it could take years for the market to normalize, the biggest impacts come right after the wave, and that’s where we are now.

Most retailers believe that next year will be slow. Barrington Carpet & Flooring president Craig Phillips puts it, “Sluggish is almost a given.” And according to a new Leading Indicator of Remodeling Activity report by the Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University, year-over-year growth in homeowner remodeling and repair will fall from 16.1% this year to 6.5% by the third quarter of 2023-slowing but not negative.

There are some elements in the equation that could stimulate the market, including a reduction in material and product costs, from building materials to flooring, though these costs won’t be returning to pre-pandemic levels any time soon. And there are also regional differences-for instance, right now, activity is high in much of the Southeast but not so much on the West Coast.

The single-family builder market has been slowing since last year. New-home sales have been declining year over year since June 2021, and existing home sales since August 2021. And from February through September of this year, existing-home sales have declined every month, and, with a couple of exceptions, so have new-home sales. According to Lawrence Yun, chief economist for the National Association of Realtors, “Inventory will remain tight in the coming months and even for the next couple of years. Some homeowners are unwilling to trade up or trade down after locking in historically low mortgage rates in recent years, increasing the need for more new-home construction to boost supply.”

Privately owned housing starts in September fell 8.1% below the August revised estimate and were down 7.7% year over year, with single-family starts falling to the lowest level in two years. And while permits were up 1.4% in September, the gains were all in multifamily.

However, even though single-family builder is down, most residential flooring contractors are still posting growth because they’re working through their backlogs. But going forward, they don’t have much on the books.

Multifamily revenue growth was moderated this year by reduced apartment turns, with many families choosing to stay put and re-up their rental agreements rather than make a move in the midst of rising inflation and interest rates-mortgage applications have been falling for months. Rehab projects in multifamily public space have been up this year, but cycles remain stretched. And in multifamily new construction, demand is high, and while property managers, who have the money to spend, have been moving cautiously, business in that channel is up. And according to FEI Group, the powerful builder and multifamily association, multifamily will be more robust than single-family next year.

For the complete story of the Top 100 Retailers, see the November 2022 issue of Floor Focus Magazine.

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