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.
