Public LBM Firms Report Meager Q1 Returns. What Are the Odds the Numbers Will Get Worse?
Two years of impressive annual returns have suddenly reversed course for building material dealers, if the Q1 returns from public companies are any indication. Net profit and same-store (aka organic) sales plummeted because of declines in both lumber prices and homebuilding/DIY activity. Companies that sell lots of lumber fared worst, but even specialty dealers reported declines in sales traffic and/or profit.
The Q1 numbers look particularly bad because lumberyards with manufacturing have been doing so well; their revenues jumped 59% and 18% in 2021 and 2022, respectively, according to Webb Analytics' Construction Supply 150. And the new reports come at a time in which dealers nationwide say they're getting fewer requests for material takeoffs. Backing up that talk, the National Association of Home Builders says the number of single-family permit issuances in January and February of this year dropped 34.3% from the same two-month period last year. The state-by-state declines ranged from 3.8% in New Mexico to 72.8% in Montana. And in the three biggest permit-issuing states, the declines were 40.2% in Texas, 31.2% in Florida, and 22.3% in North Carolina.
Are we witnessing the start of a depressing new trend? It's always hard to tell given how wobbly the economy is these days, but basic math and other reports suggest the rest of this year's P&L statements won't look as bad as Q1, even if they aren't as robust as in past years.
Start with basic math. Lumberyards were bound to see sales go down given that softwood lumber prices averaged 46% higher in the first quarter of last year than they did in January through March of this year, according to the Producer Price Index. We'll continue to see some impact from that disparity in future earnings report--April 2022 softwood sold for 39% more than it did last month, for instance--but as the months progress, last year's prices will be more in line with 2023's. That means year-over-year disparities will shrink.
Second, consider housing's continuing bulge of single-family homes under construction. There were 1.66 million such homes nationally in March, about 3% more than a year earlier and only 4% down from last October's peak, according to the Census Bureau.
This continuing bulge, combined with the drop in permits and starts, have prompted "pig in a python" imagery, along with questions about what will happen to dealers once all the homes under construction get completed. Going into 2023, there had been suggestions that dealers would begin this fall to suffer from a lack of new business. But lately, some dealers have been reporting they can stay busy through the end of this year just fulfilling current commitments. They also are benefiting from a stronger multifamily market, and inflation in non-commodity products will bring in additional dollars.
"Though the results vary slightly by region, our April sales continued to offer encouraging signs that green shoots are starting to emerge across homebuilding,” Dave Rush, CEO of Builders FirstSource told analysts on May 3. He added later: "I think what we're seeing from our customers is they are cautiously optimistic. Again, that things will be stable, and there are areas where things are showing the ability for demand to be resilient when mortgage rates are at a level where buyers enter into the market again."
That said, BFS is also alerting Wall Street of what its numbers could look like if things get worse. Here's one slide it shared:
If starts declined 20% to 30% and lumber was in the $300-$400 range, the company that posted $22.7 billion in sales in 2022 might post as little as $14 billion in revenue this year. That said, most economists aren't expecting anywhere near that big a drop in starts.
As for remodeling, contractors tell Webb Analytics they're still busy, and one recent survey suggests remodelers' optimism has grown. The Farnsworth Group's polls of Do-It-For-Me customers shows little change in their appetite for projects, and some remodeling industry experts say there's enough latent demand to get contractors through the year.