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Reopening Will Unwind Much of the Home Improvement Surge. What are the Credit Rating Implications?

Home improvement retailers in North America have experienced unprecedented earnings growth over the past 18 months as the Coronavirus Disease (COVID-19) led many people to place renewed focus on comfort and the livability of their homes, and the stay-at-home economy in 2020 further transitioned to an invest-in-the-home economy in first half of 2021. As the global economy continues its transition to post-pandemic normalcy, DBRS Morningstar expects that consumers will redirect an increasing portion of their spending toward previously unavailable services, spending more of their disposable income on out-of-home entertainment and apparel than on home decor. This, combined with inflationary pressures including wage increases, and continued investment in digital capabilities and supply chains, will make it challenging for home improvement retailers to maintain their current EBITDA levels over the near to medium term.

That said, we expect the credit profile of these retailers to remain within their current rating categories despite the earnings moderation over the near to medium term. We have not taken any positive rating actions or trend changes on our portfolio of rated home improvement retailers solely because of the record, pandemic-driven surge in demand. These issuers will likely continue to invest in improving their digital and supply chain capabilities and sufficiently manage shareholder returns such that key leverage metrics remain at levels that are commensurate with the current rating categories.