Beacon Roofing Supply, Inc. (BECN) reported earnings per share of 54 cents in the third quarter of fiscal 2014 (ended Jun 30, 2014), a 2% year-over-year decline, on May 9. Earnings also fell short of the Zacks Consensus Estimate of 59 cents. Lower gross margins from reduced selling prices due to weak demand and a continued unfavorable shift in sales mix to lower margin direct shipment and commercial business resulted in the year-over-year decline in earnings. However, this marked a significant turnaround from the loss per share of 25 cents recorded in the second quarter of fiscal 2014.
Operational Update
Total revenue increased 6% year over year to a record $663 million but lagged the Zacks Consensus Estimate of $665 million. Non-residential roofing product sales increased 9.7% followed by a 6.4% rise in complementary product sales while residential roofing products sales went up 2.7%.
Cost of goods sold went up 7% year over year to $512 million. Gross profit was $151 million, compared with $147 million in the year-ago quarter. Gross margin contracted 80 basis points (bps) from the prior-year quarter to 22.7% primarily due to continued price pressure along with increased mix of commercial and direct ship business that typically carry lower margins.
Operating expenses for the quarter increased 6% year over year to $105 million. However, as a percentage of sales, operating expenses remained flat at 15.8% due to continued cost controls and sales base growth despite the company investing $5 million in new stores to expand its footprint in the existing as well as new markets. The company posted an operating profit of $46 million, down 4% from $48 million in the prior-year quarter.
Financial Position
As of Jun 30, 2014, Beacon Roofing had cash and cash equivalents of $26 million, flat compared with Jun 30, 2013. Total debt was $227 million as of Jun 30, 2014 against $225 million as of Jun 30, 2013. The debt-to-capitalization ratio was at 27% as of Jun 30, 2014, flat with Jun 30, 2013, figure.
Cash used in operations was $47 million for the nine-month period ended Jun 30, 2014, compared with cash inflow of $49 million in the prior-year comparable period. This was due to seasonal increases in accounts receivable balances driven by increased sales during the third quarter of 2014, as well as increased inventory levels.
2014 Outlook
The company expects strong demand to continue in the fourth quarter of fiscal 2014, benefiting from its diverse product offering along with its greenfield strategy and lead to sales growth in the range of 7% to 10% for the fourth quarter compared with the 7.4% organic growth in the fourth quarter of 2013. With the pickup in residential demand, Beacon Roofing expects gross margins to improve sequentially in the fourth quarter.
For the full year, Beacon Roofing expects organic sales growth in the range of 4% to 5%.
Our Take
Beacon Roofing will benefit from its consistent focus on cost control. Its investments in equipment and inventory, along with employee training and greenfield expansion will drive growth. For the last 4 to 5 quarters, Beacon Roofing has witnessed positive sales growth for all 3 product lines.
The company opened 9 new branches in the quarter and is on track to open 25 new branches in 2014. These new branches should add 2% organic growth for the year. For 2015 and beyond, Beacon Roofing is planning to open at least 20 branches per year.
The complementary product business will grow in the balance of fiscal 2014, driven by development in new construction and remodeling activity. Commercial business will also expand in the second half, given the number of projects and bids currently in process.
Both residential and non-residential construction sectors are showing signs of improvement, which bodes well for the company. However, a difficult pricing environment will continue to weigh on gross margins.
Peabody, MA-based Beacon Roofing is one of the major distributors of residential and non-residential roofing materials as well as complementary building products in the U.S. and Canada, with more than 90% of sales coming from the U.S.
Beacon Roofing currently has a Zacks Rank #5 (Strong Sell). However, a better-ranked stock in the same industry include Travis Perkins plc (TVPKF) with a Zacks Rank #1 (Strong Buy).
Peer Performance
Among Beacon Roofing’s peers, Fastenal Company’s (FAST) reported adjusted earnings of 44 cents per share in the second quarter of 2014, in line with the Zacks Consensus Estimate. Earnings grew 7.3% year over year as strong top-line performance was offset by weak margins.
Lumber Liquidators Holdings, Inc.’s (LL) second-quarter 2014 earnings per share of 60 cents came in line with the Zacks Consensus Estimate, but fell 17.8% year over year.
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