By Michael Collins, Managing Principal, EquiNova
Drawing conclusions about the entire construction supply segment from public companies’ quarterly financial reports can be dicey, given that publicly traded companies often operate much differently than privately held businesses. But sometimes you see a trend during earnings season that’s so strong you can’t help but conclude independent dealers also are facing the challenge. In the most recent quarter, this is the trend: Sales aren’t growing as fast as expenses, and thus profits are under pressure.
You can see the trend if you take major dealers’ results and compare the year-over-year change in net sales with the change in selling, general, and administrative (SG&A) costs. At companies like Beacon, GMS, Ferguson, SiteOne Landscape Supply, and Floor & Decor, the percentage growth in SG&A exceeded the change in sales.
Builders FirstSource and BlueLinx were exceptions, with SG&A decreasing faster than sales. Still, neither was exempt from the list of companies–a list that also includes The Home Depot, Boise Distribution, and UFPI’s Construction segment–that saw net profits shrink by double-digit percentages.
Many companies got into this predicament because skyrocketing lumber prices brought in loads of unexpected revenue while demand was strong during the COVID shutdown. Workers started demanding higher wages, commissions shot up, and inflation pushed higher the price of everything from forks to forklifts. Now business has slowed, so fewer dollars are coming in. But many of those increased expenses remain.
Consultants are urging their LBM clients to get aggressive at making sure operations costs rise at a slower pace than revenue. This doesn’t mean you should try to grow your way out of the problem, as experience shows that sales growth may create the same amount of new expenses–and thus no increase in profits.
Investors know this syndrome well. If you’re thinking of selling your company, they’ll be looking at how you’ve managed the challenge. If you want to buy a company, you should examine this part of the P&L statement. Either way, we can advise you on how to avoid this bind.
