Toward the conclusion of Builders FirstSource’s (BFS) call with analysts last month to discuss the dealer’s latest quarterly earnings, chief financial officer Chad Crow gave a telling prediction when asked how he thought BFS would perform as housing revives.
“We have taken a lot of cuts out of the business,” Crow noted. “So historically, when we were at the last peak, [we were] an 8% to 8.5% EBITDA company on 25% to 26% gross margin. I certainly think from an operational standpoint we can do better than we did back then. Assuming you get back to similar levels of gross margin, I see no reason we couldn’t be a 9% to 9.5% EBITDA company.”
What Crow assumes for his company also should apply to yours. There’s scarcely an LBM dealer in the country that’s not leaner, smarter, and more efficient than it was during the housing boom. Thus, no matter whether you judge your operation by its EBITDA (earnings before interest, taxes, depreciation, and amortization) or some other financial yardstick, even greater rewards than what you were used to should come as housing revives—provided you can remain sharp even as your business grows. If you do, you stand a chance to harvest profits at levels you haven’t seen in this millennium.
The question now is: Can you keep that edge?
We raised that issue last spring when we examined shrinkage rates. Industry experts say most dealers found ways to cut shrinkage during the slump, but they also feared that a return to busier times would see those dealers return to old, bad habits. Similarly, our “Big Deals” columnist, Matt Ogden, argued in September that it’s your duty to run the most profitable, most efficient operation possible and not settle for making less money than you possibly could. Otherwise, you risk running short of capital when the next downturn comes.
This year’s Excellence Awards winners and judges underscore the notion that the best companies constantly strive to get better regardless of how good they are already. Parr Lumber, the marketing award winner, merits a spot on any listing of America’s best dealers, but it still keeps coming up with creative ways to boost its standing. TW Perry is justifiably proud of how its top-notch staff peforms, but it decided that getting things right 99.5% of the time isn’t good enough, so its tech team created a system to help it get even better. And Ganahl Lumber’s opening of a new facility is the direct result of the planning it did even before the downturn to look for expansion opportunities once the crash came and property values sank.
Our judges were similarly demanding. They could have given out more rewards, but they decided to limit their prize-giving to those companies that showed they weren’t going to stop at merely being good. Now that conditions are improving, we hope you’ll show similar drive and creativity. It’s the best way to reap the harvest created by the transformation of your company over these past seven lean years.