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Home Improvement an Inch at a Time


Hammered by the housing bust, Home Depot and Lowe's are selling do-it-yourselfers on cheaper fixes

A new TV ad for Lowe's (LOW) features a family getting a copy of a key made as the gravelly voice of actor Gene Hackman reminds viewers: "At heart we're still a neighborhood store." It may seem odd for a retailer with $48 billion a year in sales to be promoting a service for which it charges $1.47. Then again, no job is too small in the battered home improvement industry these days.

The housing bust is hammering Lowe's and archrival Home Depot (HD) hard. Riding high on the real estate boom, each doubled its number of stores since 2000. Now both are seeing sales dive as falling home prices and rising gasoline costs gnaw at consumer confidence. On May 19, Lowe's reported sales at stores open for at least a year fell 8%, while earnings declined 18%. The following day Home Depot said its same-store sales dropped 6.5% and earnings plunged 64%, due to special charges related to store closings.

With their home-equity lines of credit lines exhausted and home values shriveling, Americans have cut way back on the big-ticket projects, such as remodeling kitchens and bathrooms, that used to ring up hefty sales for the chains. "Those multi-thousand-dollar projects just aren't there," says analyst David Strasser, who follows the companies for Banc of America Securities (BAC).

BACKYARD FURNISHINGS

To make up for that, Lowe's and Home Depot are trying to sell homeowners on cheaper fixes, including painting, laying new carpet, and landscaping. Home Depot, for instance, is benefiting from the debut of a new line of paint called Freshaire. Although at $34.98 a gallon it's pricier than regular paint, consumers like that it that doesn't have any volatile organic compounds and dries fast. Lowe's, meanwhile, has been running ads reminding customers it can match any old paint for folks who want to do touch-ups. It's also had success this year with a promotion to install carpet throughout a house for a flat rate of $199—a fraction of what it used to charge when it billed per room.

Families that have had to shelve plans of trading up to a bigger house are now looking to make more out of what they have. One trend is the move to turn backyards into an extension of the home, complete with sofas, hearths, and lighting. To capitalize on that, Home Depot merchandising chief Craig Menear is rolling out higher-end patio furniture such as a new $1,000 set from Thomasville Furniture made of eucalyptus wood. "Five years ago, all we sold was aluminum. Now it's wood, wicker, wrought iron," he says. In today's market, it seems, such small luxuries go a long way .

Palmeri is a senior correspondent in BusinessWeek's Los Angeles bureau .

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