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Stock and Ferguson feel pinch: U.K.-based parent company Wolseley looks for ways to cut costs

BY HBSDEALER Staff

The stalled U.S. housing market continues to take its toll on U.K.-based Wolseley, a global distributor of plumbing and heating supplies and building materials. In a conference call with analysts on May 21, Wolseley reported that Stock Building Supply, its chain of lumberyards and manufacturing plants headquartered in Raleigh, N.C., lost $158 million during the first nine months of its fiscal year ending April 30, 2008. This compares to a profit of $19 million in the same period last year. Stock’s revenues for the nine-month period dropped 25 percent.

Ferguson, Wolseley’s plumbing and HVAC business that includes upscale bath, kitchen and lighting showrooms, experienced a 1 percent rise in sales during the first nine months of fiscal 2008. Excluding acquisitions, the Newport News, Va.-based division saw its revenues decline 3 percent and profits drop 1 percent compared to the previous year.

Wolseley executives said they intend to “focus on cost reduction and cash flow enhancement” through further restructuring, branch closures, layoffs, and “selective asset disposals” such as real estate sales. Although it was short on details, the company told analysts it was identifying properties in the United States and Europe that can be either sold outright or sold with leaseback agreements.

The properties are “a long way from major business disposals,” said Wolseley CFO Stephen Webster, who described the reale state as “peripheral stuff” picked up through acquisitions.

The company is also curtailing capital expenditures and adopting a cautious approach to acquisitions across all its business groups. But North America will feel the deepest pinch. A slowdown in the U.S. remodeling market has led to the decision to close or consolidate 75 Ferguson branches in the company’s fourth fiscal quarter, which ends on July 31, 2008. This will result in a net loss of 200 jobs. During the last 18 months, Ferguson has reduced its head count by 1,800 jobs.

The Canadian division of Wolseley North America achieved growth of 2 percent, but profits declined 15 percent. Wolseley Canada will close or consolidate 15 locations over the next two months.

“The residential markets [in Canada] held up well and have so far avoided the problems of the U.S. housing market,” said Webster. “The economy remains positive, although the strength of the Canadian dollar is affecting their exporting business, causing some price deflation in our markets as cheaper products are bought in from the U.S.”

But Wolseley’s CFO resisted suggestions to make further cuts at Stock, which has seen its work force reduced by a third, or 3,500 people, since the building downturn.

“Some of the worst performing [lumberyards] now, and the worst performing markets, are going to be in the top five residential markets over the next 10 years,” said Webster, giving Florida as one example.

“Fundamentally, we’re still looking to retain the fabric of the business,” he explained. ”The U.S. housing market will pick up. It’s a question of time.”

Webster gave an upbeat outlook for commercial and industrial construction over the next few months. While retail and commercial office buildings are showing some declines, hotel and leisure, education and health care facilities are still being built, Webster noted.

Head quartered in Reading, England, Wolseley is an international building materials distributor with nearly 5,000 branch operations in 28 countries.

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Restoration Hardware buyout gets green light

BY HBSDEALER Staff

Corte Madera, Calif.-based Restoration Hardware received shareholder approval for a planned buyout by private equity group Catterton Partners for about $179 million, a deal that was challenged at several points by Sears Holdings.

The company said that more than 99 percent of votes cast by shareholders at a meeting held yesterday were in favor of the deal. Catterton will purchase Restoration Hardware’s outstanding shares for approximately $4.50 in cash.

The deal is expected to be completed by next week.

“We are pleased with the outcome of today’s vote and appreciate the strong support demonstrated by our shareholders,” said Gary Friedman, Restoration Hardware’s chairman, president and CEO.

Restoration Hardware also announced that it reached a preliminary agreement for the settlement of a shareholder complaint filed in the Superior Court of the State of California. The class action complaint was filed against Restoration Hardware, each of its directors, Catterton Partners and certain shareholders participating in the deal.

According to the settlement, Restoration Hardware will pay $3.7 million, approximately 10 cents to 13 cents a share, to shareholders involved in the complaint.

Board member Raymond Hemmig said that the lawsuit was without merit, but settling would expedite the merger agreement. The settlement is conditional on successfully closing the merger.

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Top 500 Annual Industry Retail Scoreboard

BY HBSDEALER Staff

The numbers are in and — no surprise — they reflect a challenging market.

For the first time since Home Channel News began compiling the Top 500 Scoreboard more than 20 years ago, home improvement retailers showed an overall decline in sales in 2007. On the positive side: hardware stores and farm and fleet retailers showed surprisingly strong sales results, boosted respectively by smaller projects around the home and big-time agriculture spending.

Click here for the chart.

The worst housing downturn in recent memory has led to sub-par performances for several major retailers, dragging down overall sales of the Top 500 retailers to $251 billion — a 2.1 percent falloff from the list’s $256 billion posted the previous year.

In 2007, pro dealers were the hardest hit retailers on HCN’s Top 500 list, which also includes large home centers, hardware stores, farm suppliers and paint and floor covering retailers. Pro dealers, who cater to both new home builders and large remodelers, showed a 14.6 percent decline for the year, with Top 20 players like Builder’s FirstSource (No. 17), BMHC (No. 12) and 84 Lumber (No. 10) down 28.9 percent, 28.7 percent and 20.9 percent, respectively. Most notably, Ply Mart (No. 34) went out of business altogether.

On the other hand, hardware stores and farm and fleet retailers showed surprisingly strong sales results, boosted respectively by agriculture spending and smaller projects around the home. Overall, decliners led gainers. Just 162 companies on the list showed sales gains, while 281 showed sales declines. Compare those numbers to a good year — in 2004, for example, 404 companies showed gains, with just seven showing losses — and it brings the severity of the housing crisis into sharp focus.

“Almost certainly, the decline in these sales is a sympathetic reflection of the plunge in new home building, the steep decline in existing home sales, a slowdown in renovations and a drop in property values,” said James Glassman, managing director and senior policy strategist with JPMorgan Chase & Co. in New York.

“And 2008 sales comparisons could be worse than 2007 because activity late last year and early this year has been so abysmal. Home building remains weak, home prices are still falling and credit remains expensive and in short supply for housing.”

Two years ago, the weakness was concentrated in the industrial Midwest — places like Detroit and northern Ohio, with strong ties on the auto industry. But in 2007, the housing crisis spread to metro markets that had seen rapid price appreciation over the previous five years. The worst of these were California, Las Vegas, Phoenix and all of Florida, while Texas, the Pacific Northwest and parts of the Southwest have been somewhat more insulated.

“We’ve seen the biggest decline in the housing market since the Great Depression,” said Paul Hylbert, CEO of ProBuild Holdings (ranked 7th), which was down 16 percent in sales after an almost 30 percent increase the previous year. He said the “housing depression” has been the most pronounced in Florida, Arizona, Atlanta, Denver and Chicago because of the high incidence of exotic mortgages and subprime activity in the mid-2000s. Hylbert also pointed to deflation in wood prices from 2006 to 2007 as a driving factor in the sharp decline for LBM dealers.

Large home centers were basically flat (down 0.2 percent) for the year, but that doesn’t tell the whole story. No. 1-ranked Home Depot suffered its first-ever sales decline (2.1 percent), while the critical comp-store sales number was negative 6.7 percent. And to underscore what CEO Frank Blake called “a difficult year financially,” the retailer announced in May that it would close 15 underperforming stores — leading to the layoff of about 1,300 employees — and remove 50 future openings from the new store pipeline.

No. 2-ranked Lowe’s fared little better, with earnings down 9.5 percent and comp-store sales down 5.1 percent, while No. 5-ranked Sears suffered a 6.5 percent sales decline, with net income off almost 45 percent. “We need to come up with bigger and better ideas,” Sears chairman Edward Lampert said during the company’s annual meeting May 5, adding that he sees “no evidence” of a U.S. economic recovery in the near term.

There were, however, some bright spots on last year’s cloudy landscape. The farm & fleet segment — aided by the booming agricultural sector — showed a 12.9 percent increase, as markets like Iowa, Idaho, and parts of Ohio, Illinois and Indiana prospered because of soaring corn and wheat prices. This, in turn, led to increased sales of farm equipment and farm animal-related products and a generally better economic climate in those areas.

The jump in sales for these farm suppliers speaks volumes: No. 167 Valley Co-Ops in Jerome, Idaho, was up 66.7 percent; No. 219 C-A-L Stores in Idaho Falls, Idaho, was up 64.7 percent; No. 273 Agland Co-op in Canfield, Ohio, was up 31.9 percent; and No. 126 Farmers Cooperative Elevator in Arcadia, Iowa, was up 23.9 percent.

“Farmers have money, which is good for us in those markets, too,” said ProBuild’s Hylbert. “Of course, it’s not a large share of the business, but it does help offset what’s happening in the metro markets, which have been hardest hit.”

No. 11-ranked Tractor Supply — up 14.1 percent — opened 89 new stores in 2007, venturing into new markets like Louisiana and New Mexico. According to president and chairman Jim Wright, some of his company’s best-performing products involved the health and well-being of animals and pets, including pharmaceuticals and housing for agricultural animals, vaccinations, animal feed, and all price levels and brands of pet food.

“When you look at the categories that have performed well for Tractor Supply, it’s categories that aren’t really available in the hardware and home improvement channels,” said Wright, whose company now has 791 stores in 43 states. “The real markets we serve are not as impacted by housing, and our customers tend to be conservative in terms of taking on debt.”

Hardware store sales were also up (11.7 percent), which Do it Best president and CEO Bob Taylor attributes to homeowners focusing on smaller projects in the current economy. “When you look at the general hardware piece of it, in many cases, the members cater to more day-to-day care and maintenance,” said Taylor. “If people are staying closer to home, they’re investing in the home, so it’s more stable. We’re not talking about the major remodel — it’s the everyday activity.”

In fact, remodeling activity showed a decline in 2007 (4 percent), according to NAHB chief economist David Seiders, who estimated a 7 percent drop-off for 2008. Not quite as hard-hit as those catering to new home builders, retailers relying mainly on remodeling jobs experienced declines in the high single-digit range, according to Kermit Baker, director of the Remodeling Futures Program for Harvard University’s Joint Center for Housing Studies.

“The decline in the sales of existing homes has really taken the wind out of the remodeling market,” Baker said. “With housing prices declining, homeowners have less equity to tap into for renovations, and there’s enough uncertainty to give a lot of people pause as to whether to invest — even to sell — because they’re afraid they won’t get that money back.”

Baker believes the slide will continue this year as the commercial construction market — considered healthy in 2007 — is also slipping. “And with non-residential construction down, flooring stores (up 2.1 percent) and paint stores (down 0.6 percent) could fare even worse this year because they won’t have that market to fall back on,” he said.

Some companies have taken aggressive measures in response to these trying times. 84 Lumber announced the closing of nine stores in March and another 30 in April — bringing the total number of closures to 118 since April 2006. In other news, BMHC announced last month the intention of closing an undisclosed number of underperforming units and possibly cutting about 2,000 jobs.

Glassman, from JPMorgan Chase & Co.’s, believes we are beginning to see some positive signs, including the fact that subprime adjustable rate mortgages are being reset to lower levels, and that — in accordance with the government’s stimulus package — rebate checks began to go out April 28 and are starting to show up in retail sales.

“Most of the excess valuation in housing markets has been flushed out, with house price now back into alignment with income (affordability) that we had in 2003,” he said. “And the broad economy is looking more like it stalled last winter than falling into recession.”

Still, most experts agree, the housing market will probably not significantly improve until the early to middle part of next year. “I think the bottom is kind of in sight, and then we’ll possibly bump along for a couple of quarters as the financial markets begin to reset,” Hylbert said. “Maybe by mid-2009 we’ll start to see some things getting stronger. I hope it’s earlier, but there’s so much inventory, it will take awhile to absorb it.”

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