Big run-ups in lumber prices within the third quarter were a major reason why margins shrank at Builders FirstSource (BFS) in the July-to-September period compared with 2011’s third quarter, company officials told analysts.

Those changes hurt the company because it tends to set 90-day price guarantees around the beginning and end of each quarter, but only keeps enough lumber in stock to cover about 75% of expected demand. The rest, plus any unexpected sales needs, comes via spot market buying. That’s how it got hurt.

“We’ve seen volatility [in lumber prices] that we haven’t seen occur to this extent before,” BFS CEO Floyd Sherman said Oct. 19. “We’ve seen some unbelievable run-ups. Our price for OSB over the quarter was about a 16% increase, but if you look at it from a few weeks after the start of the third quarter to Sept. 8, it was up 48%. Then it fell off about the time you did your pricing [guarantees to customers]. So whatever replenishment you’re doing during the quarter has been at high prices. ... This created problems for us and for the rest of the industry.”

The day before the analysts’ call, BFS reported its third-quarter gross margin had fallen to 19.8% compared with 20.5% in the year-earlier period. That decline in profit was one reason why BFS’s net loss for the period deepened to $13.6 million from an $11.6 million loss in 3Q11 even though sales rose 34.3% to $291.8 million.