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The lights are still on

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Let’s get the bad news out of the way first, move on to the better news and end on a positive note. Because despite what you may have read about bankruptcies, layoffs and closed locations—sometimes on these very pages—the LBM business has not turned off the lights. Houses, apartment complexes and condo developments are still being built, and somebody out there is delivering the lumber, panels, windows and doors that go into the project.

Last year, those somebodies sold $47 billion worth of building materials to builders and remodelers. Looking at total revenues, the nation’s top 350 pro dealers generated $52.4 billion in 2007, according to research compiled by Home Channel News and sister publication Chain Store Guide, a sister publication of Home Channel News. That signifies a 12.8 percent overall drop over total sales in 2006, which totaled $60 billion.

This year marks the first time that the Home Channel News Pro Dealer Top 350 Scoreboard has shown a year-over-year decline in sales to pros. And for what it’s worth, almost every dealer interviewed for this story considered the current downturn as the worst one ever, regardless of how many decades he or she has been in the business. Of the 350 dealers on the list, 247 reported a drop in sales last year. And 152 pro dealers slogged through double-digit declines.

Now on to the good news.

Many dealers continued to thrive through the downturn, using the time to enlarge their operations and widen their customer base. When opportunity came knocking, they didn’t pretend that no one was home. Acquisition candidates came in all shapes and forms, from traditional lumberyards to ancillary businesses. Honsador Lumber, a 10-unit chain of lumberyards in Hawaii, purchased an electrical supply company last May. Alpha Electric’s four stores “are more focused on commercial than residential, and we liked that,” explained Honsador president Carl Liliequist. “Their customers work on the same job sites as ours. It’s just a different trade.” Sales were essentially flat for the $180 million Hawaiian dealer last year.

Some of the industry’s largest players looked toward commercial work as the Promised Land, given its sustained level of building activity. Total spending on non-residential construction rose 15 percent in 2007 compared to 2006, according to the U.S. Department of Commerce. Executives at Builders First Source made it clear they wanted a piece of that action at analysts’ conferences.

“We believe we can diversify our customer base and grow our sales by expanding into multi-family and light commercial business,” the company stated in its 2007 annual report. “These markets are especially conducive for sales of prefabricated components.” To advance this strategy, the Dallas-based pro dealer, No. 9 on HCN’s Top 350 Pro Dealer Scorecard, purchased Bama Truss & Components, a Shelby, Ala.-based component manufacturer that already serves the multi-family and light commercial market.

Builders FirstSource ended the year with a $23.8 million loss and $1.59 billion in sales, a 29 percent decline over 2006.

Breaking into the commercial market takes time and expertise, of course. Standard Building Supply of Salt Lake City began targeting commercial projects last fall; the jobs are just starting to come in now, according to vp Jim Ridd.

“It’s taken six to eight months to really get rolling, and the bigger jobs take even longer,” said Ridd, who oversees two lumberyards and a truss plant. Most of the commercial jobs—hotels, motels, strip malls and small office buildings—are low-rise wood structures, and that’s how Standard got the bids. “Our framing [division] got us in there,” Ridd said. “Our manager in that department has a lot of commercial experience, and that made a big difference.” The rising cost of steel didn’t hurt, especially when compared to wood, Ridd noted.

While commercial construction represented the Promised Land for a lot of dealers last year, production home building looked more like the Sinai Desert. Companies like 84 Lumber—which attributes almost 100 percent of its business to single-family housing starts—closed locations, laid off workers and found new financing when business dried up. Dan Wallach, 84 Lumber’s CFO, described his stop-loss strategy as simply “decreasing the amount of money a customer costs when they go bad.”

“We’re making a great effort to get customers to pay us on time,” Wallach explained. This includes cutting off shipments earlier to accounts that are in arrears. “Of course we have exceptions,” he said, “but we’ve cut down on those exceptions.”

Sales reported by 84 Lumber, No. 3 on the Pro Dealer Scorecard, were $3.1 billion in 2007, a 21 percent drop from the previous year.

Smaller dealers like Paradise Home Center in Union, S.C., are rolling out the red carpet for cash-and-carry customers, whom owner Dan Berry credits with keeping him afloat in 2007.

“We had such a great year last year, we’re reinvesting in the store,” Berry said. After doing a customer survey and market analysis through his co-op, the Do it Best dealer realized that the store’s strength was in its remodeling business. So Berry brought in the buying group’s home decor program, adding kitchen, bath, flooring and decking to his 60,000-square-foot store.

“It had a contractor look before, but now we’ve prettied it up,” Berry said. He hopes to reduce his house accounts and end up with a 75/25 split between cash-paying remodelers and DIY customers and contractors who use credit.

Dealers with home centers tended to do better overall last year, and a few were able to open new units or make acquisitions. Hammond Lumber, a $96 million dealer based in Belgrade, Maine, spent most of 2007 lining up the permits and then starting on the construction of a new store in Portland, Maine. Grand opening ceremonies for Hammond Lumber’s eighth location were this past May.

Sales were essentially flat last year for Mike Hammond, who splits his business between new home construction, remodeling and retail. “We didn’t have a lot of that subprime mess here,” he explained. In nearby Casco, Maine, Hancock Lumber is still supplying building materials for vacation homes for people living in New York and Connecticut. “We have a really strong customer base of second homes. These folks still have some money to spend,” said chief financial officer Glen Albee.

Robert Bowden, an Atlanta area pro dealer, expanded its geographic delivery area into some of the mountain and lake resort areas of North Carolina, South Carolina and Georgia last year. The strategy worked well, according to president Steve Cole, and Robert Bowden, the three-unit dealer based in Marietta, Ga., marked its 25th anniversary in June. Two of its Atlanta competitors, wheeler’s and Ply Mart, struggled through 2007 only to close their doors this year.

Finding business outside the Atlanta area was “just one tactic,” said Cole. It’s more important, he said, to “make good long-term decisions rather than reactionary moves that can damage employee morale and destroy service levels.” Simply downsizing the business, or trying to match expenses to revenues, may not be enough in times like these.

“We believe that the entire industry landscape will look much different on the other side of this downturn,” he said.

Methodology

The research for Home Channel News’ Top 500 Retail Scoreboard began with HCN’s sister company, Chain Store Guide, a Tampa, Fla.-based research firm, under the leadership of senior editor Arthur Rosenberg.

Companies selected for inclusion on the Top 350 Scoreboard are building materials dealers with a significant lumber business and a customer base primarily serving builders, remodelers and contractors.

Information collected by Chain Store Guide was edited, proofed and fact-checked by a team led by Rosenberg and HCN managing editor Michael Moran Alterio. Some of the Top 350 companies did not provide complete data to Home Channel News. For those companies, HCN estimated sales and other data, working primarily from public filings where available; from comparisons with similar, nearby companies; and from each company’s past performance. Estimated data is highlighted in the footnotes.

Pro dealers on this list are ranked by total sales, not by the fraction that are sales exclusively to pros.

For companies with equal sales, rank in the Top 350 Retailer Scoreboard is determined by comparing sales growth and number of stores. If two companies have identical sales, the one with higher growth is ranked first; if growth is the same, the company with fewer locations is ranked higher.

A deep historical data set with greater breadth than can be offered in print is available in spreadsheet format on HCN’s Top 500 Retailer Scoreboard on CD. For information on ordering the basic or premium Top 500 data CD, please contact Michael Alterio at (212) 756-5235 or visit www.homechannelnews.com/specialreports.