Stock Building Supply, America's No. 2 LBM dealer, recorded an operating loss of $246 million in the year ended July 31, Stock's parent company, Britain-based Wolseley Plc, reported today. That loss came despite a slashing of headcount and "has necessitated a fundamental review of the business," Wolseley said in its annual report. The slumping U.S. building supplies market also dealt Wolseley a second blow when it took a $40.7 million charge for the reduced value of shares in Building Materials Holding Corp. (BMHC) that Wolseley received as part of a 2006 acquisition of Denmark's DT Group.

Revenue fell 24.5% to $3.47 billion from $4.6 billion in the year-earlier period. Same-store sales accounted for 21 points of the decline, while previous branch closures knocked off another 4 points. A further three-point decline based on price deflation in lumber and panels was offset by a three-point contribution to revenue from acquisitions during the 12-month period.

Wolseley noted that Stock's operating loss also reflects $65 million in provisions for doubtful accounts receivable and construction loans. It didn't say what its previous provision was for these bad debts. Stock's construction loan receivables stood at $436.1 million as of July 31, down from $526.4 million a year earlier. "The decrease reflects a more cautious approach to lending following the decline in the U.S. new housing market and an increase in provisions," Wolseley said.

Stock also booked $13 million in restructuring costs relating to 36 branch closures and headcount reductions. (At the same time, it has added 13 branches. Thus, the Raleigh, N.C.-based company had 285 branches as of July 31, down from 308 a year earlier. In addition, Stock said it reduced its headcount by 20% during the fiscal year ended July 31 to reach 3,150, then dropped another 135 positions in August. All told, Wolseley said, Stock's restructuring plans and other initiatives should save it $124 million a year.

Nevertheless, Wolseley was pessimistic about the future. "While the U.S. commercial and industrial markets are likely to remain stable for the next few months, a number of markets in which the Group operates are expected to deteriorate in the short term," the company said in the Outlook section of its report. "...Although headcount in Stock has already been reduced by more than 40%, further deterioration in the U.S. new housing market has necessitated a fundamental review of the business, in order to reduce its impact on Group results."

An article by Bloomberg quoted Wolseley CEO Chip Hornsby as saying a sale of Stock was among the options Wolseley would consider. But in an interview carried on the company's Web site, Hornsby declined to say the same. "We're looking at ways we can reduce costs, eliminate any overruns or duplications in facilities, and prepare the organization for an even more difficult time to come," Hornsby said. Refusing to answer a direct question about a sale, he instead said: "The biggest thing I would want to come across is that we've ridden this decline down, if you will. We certainly want to participate in the upside."

"As Wolseley noted, we are continuing to look at options to restructure the business," Stock president Joseph Appelmann said in a statement. "In a company of our size and scale, there are numerous options, including downsizing the business and determining if we should leave some markets. The U.S. housing market will continue to be challenging in fiscal 2009. We will position ourselves to not only survive the downturn, but to take advantage of the upturn when conditions improve."

There have been rumors in London financial circles that Wolseley was putting Stock up for sale and was having troubles paying its debts. Wolseley did say in its annual report that the company's board remains confident it will comply with its banking covenants through July 31, 2009, and that it has no plans to renegotiate those banking terms or raise equity.

Wolseley's downbeat report reflects its assessment of the dour market for new home construction in the United States, which provides about 72% of Stock's revenue.

Wolseley calls itself the world's largest specialist trade distributor of plumbing and heating products to professional contractors. Along with Stock, its other major U.S. investment is the Ferguson plumbing supplies business. Wolseley said operating profit for that group dipped 0.8% to $794 million on a 1.3% increase in revenue to $11.23 billion.

In a side note, Wolseley also announced it had charged off $40.7 million of a investment in shares of BMHC, the San Francisco-based LBM operation that ranks No. 5 on this year's ProSales 100. Wolseley acquired those shares in July 2006 when it bought the DT Group of Copenhagen, Denmark, the largest building supplier in Europe's Nordic region. Wolseley said it has no plans to buy more stock in BMHC, which has had significant problems of its own over the past year.