It's not like you couldn't see it coming. After a 10-year stretch of smooth sailing for virtually every player in residential construction, things began to get rough last summer as the housing market foundered, commodity wood prices sank, and industry consolidation pressured everyone to respond. But anticipating a storm is one thing; navigating through it can be something altogether different, and even seasoned pro dealers who rank on the 2007 ProSales 100 admit that keeping the helm steady since mid-2006 has been a challenge in and of itself.

The housing market's downturn last year led to a lot of churn in ProSales' annual list of the biggest pro dealers. One-seventh of the companies listed last year aren't in these latest standings, some because they were acquired, continuing a trend from 2005. A hefty share of companies reported sales drops last year, and the number might have been even bigger if one could separate out dealers whose growth was due solely to acquisition. Some other dealers simply didn't want to report what to them was discouraging news.

"We started out pretty good last year in January, February, and March, and then April hit and it was just like somebody turned the lights off, and I think that's the way it was for almost everybody," says Brent Hanby, executive vice president and CFO for Springdale, Ark.-based National Home Centers (No. 27), who compares the current prevailing winds in construction supply to similar downturns in 1982, 1989, and 1996. "We've gotten through it before, and we'll get through it again. Normally it is one to two years before the curve starts back the other way, and I think we are still in the middle of it."

Hanby's not alone in his prediction. As ProSales 100 dealers look at their gauges and digest damage reports from sales crews, the general take on 2007 is that revenue currents will run opposite to 2006, in which rough going the first half will be followed by a brisk fall and winter. "The opposite of last year? You couldn't take the words out of my mouth any better than that," says Tom Rainwater, secretary and treasurer for E.C. Barton & Co. (No. 28), which ranked third in overall sales growth (","). "That is exactly what is going on with us."

Based in Jonesboro, Ark., E.C. Barton boosted 2006 sales with the June 7 acquisition of 56 Grossman's discount home centers, spreading the pro dealer's footprint into Ohio, New York, Rhode Island, and Massachusetts. "Any kind of growth in last year's market was good growth, and Grossman's was a very successful acquisition for us," Rainwater says. "We think we have a good hold on absorbing the acquisition, and we think there are some growth opportunities in Grossman's markets."

In addition to the E.C. Barton/Grossman's deal, June also saw Englewood, Colo.-based Pro-Build Holdings acquire Broken Arrow, Okla.-based Hope Lumber and Supply Co., capping off a major M&A effort that combined The Strober Organization, Hope, and Lanoga Corp. to form this year's top ProSales 100 dealer. "There is a feeling of pride and accomplishment putting all of these companies together, but we have higher aspirations, we see huge growth opportunities," says Pro-Build CEO Paul Hylbert. "We estimate the market at about $180 billion, and if you pegged our market share at about 3%, you'd be right."

Shrinking Middle Class

As Pro-Build and industry players like Stock Building Supply (No. 2) and HD Supply (No. 3) build through acquisition, the upper echelon of the pro dealer middle market is eroding. "When everybody above you gets acquired, it's not that difficult to move up on the list," explains Johan van Tilburg, president of Knoxville, Tenn.-based Tindell's (No. 88), which cruised onto the ProSales 100 after three consecutive years stationed on the ProSales 100 Next 25 listing (see "The Next 25," page 62). "The big are going to get bigger, and the middle class has to try to fill in that range between $100 million to $400 million that has become the target market for the big boys."

The stormy market put major deals on hold during the second half of 2006, but most of the acquisitive companies are indicating they will get back on course as 2007 unfolds, especially if valuations begin to reflect the more challenging pro dealer sales climate. "There may be an adjustment period for valuation expectations for both buyers and sellers," says Kevin O'Meara, president and COO of Dallas-based Builders FirstSource (No. 7), "but we expect consolidation will continue in the industry."

Even 84 Lumber (No. 4)–historically focused almost entirely on organic growth–has signaled a readiness to play in the consolidation market, particularly when adding construction services to its value-add portfolio. "We have an agreement in the works with a framer in Denver that is still going through due diligence," says Frank Cicero, executive vice president of store operations for the Eighty Four, Pa.-based dealer. "I could see us taking his knowledge and expanding into other markets in 2008. So we will do acquisition, but it will not be in leaps and bounds. We are much better doing something ourselves. That's just our culture."

Additionally, at press time, The Home Depot was seeking a buyer for its HD Supply division (see "The Case for HD Supply," page 68) as part of a strategic re-evaluation of the unit that includes locations previously operated by Williams Bros. and Cox Lumber.

Coming About

Certainly, improved housing conditions–particularly among larger production builders–would freshen both the unfolding M&A market and the general sales atmosphere among the ProSales 100. Outside of huge production metro markets like Phoenix and Las Vegas, many dealers see customer inventories beginning to sell and expect strong third and fourth quarters. "We are starting out this year tough, but we are expecting improvement toward the middle of the year," says Kim Beisser, CEO of Beisser Lumber in Grimes, Iowa (No. 85). "Inventories of houses are being sold, slowly, but they are still selling, and we have some builders getting their inventories down to where they are ready to start putting holes in the ground."

In the Northeast, Mansfield, Mass.-based National Lumber Co. (No. 35) CEO Steven Kaitz sees a similar scenario unfolding. "For 2007 I would say we will be flat for four to five months, but I am looking for a very strong second half."

While the builders may be on the road to recovery, commodity lumber prices are likely to stay low. A comparison of composite prices from industry publication Random Lengths puts framing lumber at $280 for the first quarter of 2007, down from $380 in Q1 2006. Structural panel composite prices are even worse, sliding from $400 in Q1 2006 to $275 in the first quarter of 2007. "Fifty thousand sheets of OSB last year generated revenue well over half a million. This year you don't even get to $300,000," laments van Tilburg. "And it takes the same amount of people and the same amount of trucks to move those sheets. The costs don't go away, but the revenue does, and that is what is tough right now."