Stop Policy: A Believer in the Free Market
From ProSales, By Greg Gregory: We’ve learned this. Every intervention leads to the need for another intervention. Washington has circled the wagons around Wall Street, and Main Street has been relegated a role as a spectator who’s paid for a scalped ticket.
Greg Gregory, president of Builders Supply Company of Lancaster, S.C., has this idea: How about we just stop with the programs, the plans, the bailouts, the stimuluses, the rescues and the recovery acts? They only make things worse and last longer, he feels. Here’s the lead of a provocative, well-thought out piece as it appears on ProSales magazine’s Web site.
Greg Gregory, president, Builders Supply
Is it more painful to slowly remove a bandage or to rip it off? Policy makers face a similar dilemma in choosing a course of action to arrest the downward spiral of the nation’s housing market. Should housing prices be slowly propped up and foreclosures stalled through government action, or should the free market be allowed to work, regardless of the immediate and collateral damage that such action would precipitate?
Before answering that question, let’s examine what brought our industry to the edge of the abyss. Housing and finance drove much of the growth in jobs and tax collections over the past decade. Unfortunately, easy credit fueled a boom in starts that went on two years too long. Consequently, houses that should have been constructed in 2007 and 2008 were largely completed in 2005 and 2006.
The result of this aberration is that many of these homes are now in foreclosure. This has depressed home prices and flooded the market with inventory. Today’s question is: How can we find a path back to normalcy?
This is the first serious downturn our industry has faced since the early Reagan years, so it’s useful to have some perspective. The building industry has survived tough periods before, including the Great Depression, the shortages of World War II, whipsawing starts in the 1970s and double-digit interest rates in the early 1980s. The causes of each calamity were different, as was the government’s response….(more)
Have a look at where he goes with the piece.
Big Day Among Big Days
9:00 a.m. S&P/Case-Shiller Home price data
10:00 a.m. Fed Chairman Ben Bernanke testifies befor the Senate Banking Committee; February consumer confidence
Noon Fed Governor Elizabeth Duke speaks
4:00 p.m. Stock Markets close
9:00 pm President Barack Obama addresses Joint Session of the Congress with the state of the union
Home Depot’s earnings came in, slightly better than analysts forecast. The operative phrase from Home Depot CEO Frank Blake:
“We expect the home improvement market in 2009 will remain just as challenging as 2008.”
ProSales Online reported yesterday that two more regional lumber yard operations have succumbed to the housing and economic crises, one of them a Missouri-based company that opened more than 150 years ago.
The two latest institutions to go out of business are Landreth Lumber, based in Bunker Hill, Ill., and Springfield Mill and Lumber in Missouri.
A spokesman for Landreth told ProSales today that its closure was involuntary–the result of Landreth’s bank deciding to stop providing credit to the 53-year-old southern Illinois institution. Shuttered were lumberayrds in Cottage Hills, Bunker Hill, and Jerseyville, Ill., as well as a manufacturing facility in Jacksonville, Ill. Roughly 60 employees lost their jobs.
…
In Missouri, the Springfield News-Leader reported today that Springfield Mill & Lumber will be going out of business in about a month. Southern Supply Co. has purchased a majority of the LBM operation’s inventory and hired more than half of its 20-person workforce, M. Lloyd Wright, owner of Springfield Mill &Lumber, told the newspaper.
Hold onto your hats.
Lowe’s Ebb: Same Stores Cede 7% in ’08, More in ’09
From PROSALES ONLINE, By Craig Webb: DYI consumers and “prosumers” powered the explosion of hybrid building materials, hardware, home appliance, and home and garden supplies super stores through the latter part of this decade. Now, the triple-threat of job losses, household balance sheet deleveraging, and choking commercial credit has cut off important oxygen supplies to both longstanding No. 1 player Home Depot and its feisty rival Lowe’s.
ProSales magazine and online editor Craig Webb reports on Lowe’s reel of fortune, both a 60% year on year earnings decline, and a sharply challenged 2009 outlook.
Lowe’s Companies Inc. today reported its sales at stores open at least a year fell 7.2% in fiscal year 2008, ended Jan. 30, and predicted same-store sales will drop another 4% to 8% over the next 12 months. The company also said it will open just over half as many stores in the coming year as in 2008.
Net earnings for the fiscal fourth quarter ended Jan. 30 sank 60.3% from the year-earlier period to $162 million on a 3.8% drop in revenue to $9.98 billion. Net earnings for the fiscal year shrank 21.9% to $2.2 billion on a drop of just 0.1% in sales to $48.2 billion. Those sales numbers were boosted by the addition of 115 stores last year; as of Jan. 30, Lowe’s operated 1,649 stores in the United States and Canada.
Tuning into the company’s conference call with analysts, ProSales editor Webb reported Lowe’s senior strategists’ read on whys and wherefores of the sales swan dive and continued challenges. In short, consumers are simply shying away from the big bills that come with major home improvement undertakings right now. They’ll only do what they have to to keep their homes secure from heavy weather, financial or meteorological.
Larry Stone, President/COO of Lowe's
Larry Stone, Lowe’s president and chief operating officer, told analysts during a conference call that one reason why sales fell was that customers were doing fewer big-ticket renovation projects, such as kitchen projects. Similarly, Lowe’s revenue for installed sales projects, such as carpet and window installations, declined 14.4% in the fourth quarter from the previous year and was down 6% for the year. Discretionary expenditures accounted in 2006 for 45% of sales, he said. Now, they account for about one-third of sales. “[Customers are] hesitant to invest in large projects,” he said.
On the other hand, hurricanes and storms spurred purchases of shingles and other building materials. Had those purchases not occurred, the sales totals would have been one percentage point worse.
For those in dire need of a silver lining, look east, Stephen East, that is, Pali Research’s home building and building materials analyst. East reports that Lowe’s ebb-tide outlook is no surprise. What could non-plus industry observers, however, can be found under the rug. Here’s what we mean.
On Lowe’s conference call this morning, the details of the quarter were unsurprisingly negative for most categories, thereby transferring the pain to building products companies. However, there were a couple of positives for our coverage, one surprisingly so. Lowe’s saw same store sales start weak in November, improve in December then weaken again in January, which obviously causes consternation for investors of building products companies.
Fortune Brands (FO) and Masco (MAS) likely suffered with most all product categories, while Mohawk Industries (MHK) may have been a beneficiary of a surprisingly positive performance. Only two categories associated with our companies covered had positive commentary—Paint and soft flooring. Management specifically mentioned that while total flooring was down double digits, Carpet sales remained strong. Given that Mohawk is a significant supplier, we find that encouraging. Paint was strong, which, while not helping Masco directly, implies that Home Depot will also turn in a good performance there, helping Masco and its dominant floor share in paint. To the negative for both FO and MAS, both Cabinets and Fashion Plumbing were down double digits. Given American Woodmark’s aggressive market share stance in Cabinets, we worry that these two companies could have not only endured poor comps, but also lost share. In Fashion Plumbing, these two competitors dominate the floorspace, so expect that to impact sharply on results in the quarter.
In sum, we are pleasantly surprised with the ray of hope on Carpet sales and the potential impact on Mohawk, however, the overall trends portend more struggles for FO and MAS.
The data suggests that rather than tackle the big ticket home improvement projects, consumers–showing that good old American ingenuity–would like to sweep things under a new carpet for the time being.
Here’s how equity investors are discounting for Lowe’s continued headwinds. Above is an intraday chart that shows how the market reacted to the company’s earnings announcement. Below is a 6-month look at the stock’s trend.
Friday, Feb. 20, 2009... A tough outlook.
Lowe's stock performance for the past 6 mos.
Spigot Tightens on Lumber and Building Materials Supply Line
From PROSALES Online, By Andy Carlo: No sense in burying the lead here. Cash = King.
Cash conservation is and will be the new growth, as least for the visible future.
Builders FirstSource, a Dallas-based lumber and building materials dealer that amassed a distribution and market presence empire on the back of a high volume builder strategy, is in heavy-duty damage control mode. Its new scorecard, reports ProSales magazine senior editor Andy Carlo, is to outperform a free-falling market and try to stick around for the eventual and inevitable salad days ahead. Survival is tantamount to a rocket ride to top-tier status in the LBM sector, but no one’s saying it’s going to be easy.
Carlo gleaned statements from Builders FirstSource CEO Floyd Sherman for perspective on the survival plan.
Floyd Sherman, CEO Builders FirstSource, link to Q4 financials
“We felt the impact of these difficult conditions on our 2008 results although we were able to limit it through our action plan,” said Floyd Sherman, Builders FirstSource CEO.
“Our action plan principally consisted of growing market share, reducing physical capacity, adjusting staffing levels, implementing cost containment programs, managing credit tightly, and, most importantly, conserving cash,” he added.
The dealer closed or mothballed 14 facilities during 2008 while lowering its average headcount by over 1,600 to 4,850 in 2008, a decrease of 25.2 percent from 2007. Our headcount at December 31, 2008, was down over 2,100 to 3,274, a 39.3 percent decrease from the beginning of 2008, the dealer said.
As of today, Builders FirstSource operates 58 distribution centers and 57 manufacturing facilities in 11 states.
During a Friday conference call to discuss Q4 financials with analysts CFO Charles Horn was asked about the ability of builders to pay their bills. He said the larger builders still have been paying their bills, but at the same time BFS is seeing more regional and small builders moving toward an orderly liquidation. He said this is because a number of builders’ operations are structured for tax purposes so that the losses incurred by the construction company can flow back to the company’s owner. “I think you’ll see more and more builders say ‘I’ll take the tax refund and wind down operations’,” Horn said.
BLDR intraday stock performance. Click for company update.
Meanwhile, CEO Floyd Sherman said it’s apparent that banks are forcing their private builder borrowers to stop any spec construction, and are requiring builders to reduce inventories before they get any more loans. “We’re going to see some really diminished inventories over the next few months,” he said. Sherman (who appeared to base his forecasts in part on Harvard Joint Center for Housing Studies numbers), said Builder FirstSource doesn’t expect any upturn until at least the third and fourth quarters of this year.
Recovery Bill Doesn’t Go Yard, But Gets to First Base: NLBMDA
From PROSALES, By Craig Webb: All manner of groups will weigh in now that the American Recovery and Reinvestment Act is about to get President Obama’s signature.
It’s not what we wanted, but since our membership dues pay good money for lobbying on Capitol Hill, you can be sure that we got our money’s worth from those efforts.
Really, what you can be sure of is that the moment the $15,000 tax credit for home buyers of new and/or existing homes came off the table, and the 4% or less home mortgage buy-down got eliminated from consideration, many home building and remodeling related businesses felt their hearts sink. Ask many of he proprietors of these companies do they want a government hand-out, and they’ll tell you absolutely not. What they do want is for people to be able and willing to buy houses again, and this is what they doubt after Congress wiped out the Fix Housing First agenda.
Lumber yards will lose from this bill, despite some of the jobs, spending, and housing specific programs that the Democrats left in it. Here’s ProSales editor Craig Webb in a day-after analysis of plusses and minuses of the legislation.
The National Lumber and Building Material Dealers Association’s (NLBMDA) statement today on the bill mixed pleasure and disappointment with a resolution to continue lobbying for housing industry relief. NLBMDA applauded how the American Recovery and Reinvestment Act includes an extension of bonus depreciation and Section 179 direct expensing as well as creates, continues, or expands tax credits for energy efficiency. But it then said: “We are disappointed that Congress did not adopt the more robust $15,000 homebuyer tax credit, limited the application of the net operating loss carryback provision, and rejected an amendment to provide 4% mortgage financing under certain circumstances.”
The statement also quoted NLBMDA chairman Paul Hylbert as saying the group “will continue to work with Congress, the Administration, our housing industry allies and our members to achieve an effective housing recovery plan as soon as possible so that we can develop, once again, a robust and vibrant housing market as a critical element of a strong economy.”
Lots of groups hope the stimulus works, but aren’t exactly betting on it.
David Axelrod Connects the Dots on $50 Billion Housing Program Due this Week
David Axelrod was on media tour this morning, trying to ratchet spirits and expectations around President Barack Obama’s plan to map out a $50 billion-plus program to stem foreclosures and stabilize housing prices.
Here’s the topline from the Wall Street Journal’s account of Axelrod’s infomercial on what Main Street and the financial markets should expect in this week’s plotline.
Speaking on “Fox News Sunday,” senior adviser David Axelrod said the plan that President Barack Obama plans to announce on Wednesday will aim to stem foreclosures, provide immediate help to homeowners who are “right on the edge” of foreclosure, and ultimately help in “raising home values that have been plummeting.”
Mr. Obama plans to unveil his housing plan during a visit to Phoenix. As part of his swing through western states, he is set to stop in Denver Tuesday, when he will sign the $787 billion economic-stimulus plan just passed by Congress.
Mr. Axelrod provided few details of the housing plan, but said a government investment of $50 billion to $100 billion to fund foreclosure prevention “is obviously a necessary part.” He promised that the plan would contain “a lot of aspects.”
Later, Axelrod zipped over to NBC’s studios in DC to to carry the crusade farther on “Meet the Press.” Here’s the clip.
For Home Builders, It’s All in the ‘Tude
Can things get better even as they deteriorate?
The economic news headlines grow more dire by the day, but some of the home building executives trodding the Las Vegas Convention Center show floors may just prove that good attitudes trump bad metrics and measures as they find ways to survive the next leg of the disaster flick that is home building.
One of the more commonly spoken sentiments during the National Association of Home Builders International Builders’ Show is along the lines of “I read the obituaries every day, and I haven’t read mine yet.” 2008 was the worst year in home building in the lifetimes of anyone still in the game, and yet, here they were at IBS trying to learn how to manage through another whopper of a year.
Two noticeable positives are getting some chatter, even as realistic home builders understand that the coming 10 months are not likely to offer much encouragement in the way of home buying demand. One is that banks seem to be moving off their positions of inflexibility with regard to re-terming their loans with home builders. The reasons for that are relatively obvious: a). they don’t have much choice but to adopt a more flexible mode, providing they can stay clear of regulatory missteps in managing their loan portfolios; and b). they’d really rather not take land assets on to their books, as there’s no market of buyers out there who covet land at any price.
The other positive getting talked about is that after a 10-year boom, you’re actually seeing some innovation come into the products and processes area of home building that likely would never have happened had things kept up so strong.
For Irvine, Ca.-based MBK Homes president Tim Kane and his team, walking the floors of IBS this year has been a refreshing change from the previous several. People actually have time for one another, so conversations can be more expansive and solutions can be developed carefully as opposed to the rushed herd mentality that ruled prior years’ home builders’ show.
Kane, whose company is making strategic moves to become a best-practices environmentally smart builder, says one of his discoveries at this year’s event will “pay the price of admission.” Kane, you see, wants to do green right, and to that end he’d rather not even use the term green to describe the company’s efforts.
“We should say we’re being energy smart, or water-efficiency smart, or health-smart, but to say ‘we’re green’ is not necessarily the truth in what describes our efforts,” says Kane. So, he and his folks scoured the show floors and came up with a piece of engineering that he’d only hoped existed… a tankless water heater with a recirculation pump that saves both energy and water, manufactured by a company called Navien America. The product will solve both environmental and cost problems, and it’s likely that if the slowdown hadn’t happened, Kane and his folks might never have had the time to sleuth it out at the IBS.
So, fewer people in the aisles at the show may wind up making up in part for the absence of the throngs of possies here in the past. And the attitude, no matter what the latest homebuilder index of sentiment says, is intrepid, determined, positive.
Nests Less Feathered
Compete, an online analytics provider, captures consumers’ online spending and shopping on dyi and home improvement in a nutshell.
Data from Compete.com via Seeking Alpha
’09 Glimmer of Optimism by the Yard
From PROSALES, by Craig Webb: Almost one out of two pro dealers at lumberyards, molding/millwork shops, and short line specialty companies has chalked up operations in the red in 2008 to housing’s 100-year storm. For 40% of respondents to a ProSales survey, business this year is off 20% or more thanks to the housing economy’s convulsive correction to years of bubble buying.
Regardless of location, respondents from lumberyards, molding/millwork dealers and short line dealers were more optimistic about sales in 2009. Only 8.2% of dealers expected another 20% drop in sales next year, and 58.8% expected their location would turn a profit. Northeasterners were most cheery about the future, as none of them expected sales to go down as much as one-fifth in 2009 and 63.3% forecast an operating profit. On the other hand, Southerners were gloomiest regarding sales, with 10.5% foreseeing another 20% fall, and Westerners had the bleakest profit expectations, with only 48.6% expecting to be in the black in 2009.
“It feels like we are approaching a bottom,” one dealer from New England wrote. “Since our core of small contractors is adaptable and can take on smaller projects, our customers are mostly holding steady. While I think this winter will probably get worse, I feel that by late 2009 we will be seeing an uptick in business overall.”
Uptick. We’ll take it if we can get it.
October: Worst So Far, But not Worst to Come
From PROSALES, by Craig Webb: Top 10 home builder MDC Holdings’ CEO and chairman Larry Mizel talked briefly with Eric Belsky, executive director of the Joint Center for Housing Studies at Harvard University, in the halls of the Big Builder ’08 Conference in Washington, D.C. this past week. Belsky said to Mizel, “What did you think of the September numbers for new home sales? Up 2% sequentially from August, but still pretty ugly, eh?” Mizel’s response: “Wait’ll you see October’s. Much worse.”
While New Home Sales rose 2.7% sequentially to 464K in September, slightly better than the Street’s 450K estimate, we note they retained most of August’s sharp 13% seq. drop, and moreover, remain down strongly YOY at -33%. — Michael Rehaut, executive director for home building and building materials research, JP Morgan
Still, much worse to come, as in many home builders report that their sales went into an eerie radio silence in October as the lending crisis, home price trends, and pre-election sentiment fell off a cliff. A hazard of all the benchmark data points we obsess over is that it’s not enough for companies and their industry sectors to live through the difficult days as they occur. They have to relive them in the reports that torturously follow what happens weeks, months, quarters later.
Among the many companies whose senior managements reported earnings in the past couple of weeks, parading historically punishing performance, were lumber, building materials, and other supplier companies to the residential and light commercial construction area. Well after home building companies realized collectively that the bottom had fallen out from under them, building materials and supply companies were cranking at full capacity. Why? The time warp created by backlogged sales of homes made it so that trades and materials suppliers alike continued in great demand.
So, just as in almost every other business sector where signs were clear that a huge storm was brewing, companies in the building materials and supply area could hardly shrink enough in preparation because their wares were still needed for the building machine until demand all but vanished. Now the outlook for a rekindling of activity is bleaker than bleak. While veterans know that recovery must occur, it’d be foolish to guess when that might be in light of a real economy recession and an angry 10-plus month supply of homes to burn through before supply and demand order gets restored to housing.
Covering many of these companies’ quarterly [non]-earnings performance, ProSales editor Craig Webb offers analysis of three mega players who manned the phones this week with analysts and investors seeking clues to what may come next. Loathe to forecast for better or worse, most business leaders are talking about shrinking balance sheets to ride out harsh times in the months ahead. Here are Webb’s write-ups of BMHC, Boise Cascade, and LP.
- BMHC’s Net Losses Reach $45.2 Million in 3Q
- Sales Fall at Boise Cascade
- LP’s 3Q Net Loss Hits $111 Million
“As the unprecedented volatility in the capital markets and the downturn in the homebuilding industry persisted, we remained focused on our goal of realigning our business to the current environment,” Robert E. Mellor, BMHC’s chairman and CEO, said in a statement. “We made significant progress on our restructuring program during the third quarter, executing on a wide range of operational and financial actions designed to address the impact of the homebuilding industry downturn. Importantly, we successfully negotiated an amendment to our $540 million secured credit facility.
“Year-to-date, we have reduced selling, general and administrative expenses by $51.2 million, or 16%,” Mellor said. “We continued to enhance our liquidity during the quarter through the wind-down of certain operations and the sale of underperforming business units and excess assets. We remain on track for these and other restructuring initiatives.”
For a broader perspective on what to expect–although what to do about it is up to you–comes today via Australian TV. We picked this up originally from Calculated Risk, which featured a video link spotlighting Yale economist Robert Shiller speaking about what is going on economically. Watch the whole video and note the way the professor is practically undone as he tries to get words around the magnitude of the crisis.
Equally noteworthy is Calculated Risk’s quote from Fed Governor Kevin Warsh. Warsh does not dismiss the central role housing has played in the sequence of financial shocks to the global economy. However, he puts the sector into proper perspective, pointing out that the error of our ways extended to overpricing far more than housing. The most sobering takeaway: Things are going to get worse, broadly, before they can get better.
Acknowledgements:
Calculated Risk, Nov. 6, 2008, Fed’s Warsh: Fundamental Reassessment of Every Asset Everywhere, http://calculatedrisk.blogspot.com/2008/11/feds-warsh-fundamental-reassessment-of.html