Ferguson Fights On

June 1, 2008
Despite being pounded by the U.S. housing market, Ferguson Enterprises is a distributor worth keeping an eye on.

With U.S. residential construction continuing to slump, Ferguson Enterprises, Newport News, Va., has been tossed by stormy seas. As a major national distributor of plumbing supplies; industrial pipe, valves and fittings (PVF); heating, ventilation, air-conditioning and refrigeration (HVAC/R); and mechanical and waterworks supplies, the company is heavily invested in the residential market (though industrial and commercial play an even larger role) and is trimming its sails to weather the storm.

The company has a continental footprint, with about 1,400 locations across all 50 states, Puerto Rico, Mexico and the Caribbean employing about 22,000 people. Together, they generated $9.65 billion in 2007 revenues.

Late last month, Wolseley Ltd., Ferguson's UK-based parent company, announced that 200 more jobs would be cut and 75 Ferguson locations closed in response to the decline in U.S. housing market. This follows a 10 percent reduction in staff in late 2007 and early 2008.

“Given the continuing tough market conditions, our response has been to take further action to lower the cost base and improve cash flow, while continuing to pursue our longer term strategic aims,” says Chip Hornsby, Wolseley's group chief executive. “Challenging conditions in many markets are expected to continue, although the U.S. commercial and industrial market, which accounts for the majority of Ferguson's business, is likely to remain stable into the next financial year.”

Hornsby elaborated on the group's expectations for Ferguson in a conference call to analysts. “The U.S., in my view, is going to get worse before it gets better, particularly for our industry. The enormous amount of inventory that we have today in housing, particularly in markets like Florida, Arizona, California and Nevada, are of huge concern,” Hornsby says. He sees the Canadian market as being more stable but said there's still cause for concern about the impact of U.S. market conditions there. “The energy sector up there is nowhere near as vibrant as people would envision it be out of the oil sands a year ago, even with higher oil prices.”

Wolseley's May interim report says Ferguson continued to gain market share for the nine-month period that ended April 30, and had achieved revenue growth of 1 percent due to acquisitions. Organic revenue growth from existing operations, however, declined 3 percent and profit was down 1 percent from the same period in the previous year.

The company also said Ferguson “continues to adopt a cautious approach to acquisitions and no further acquisitions have been completed since the interim results announcement. Capital expenditure plans have been curtailed and total capital expenditure for the year ended 31 July 2008 is now expected to be $633 million to $653 million.”

Ferguson was continuing to make bolt-on acquisitions as recently as April, when it bought a $4.4 million plumbing distributor in San Francisco and a cabinet distributor in Naples, Fla., with sales of $5.1 million.

Although its acquisition plans are on hold for now, the company continues to expand with new locations in select markets. In April, with the housing downturn already showing its teeth and with layoffs amounting to 10 percent of its workforce fresh in mind, the company opened a new 15,000-square-foot location for its waterworks distribution in Clifton Park, N.Y., as well as showrooms Vista, Calif., and Rocky Mount, N.C.

Despite the brutal impact of the downturn in U.S. residential construction, Ferguson continues to be a distributor to watch. Operating through a network of nine central distribution centers, and carrying over $1.6 billion in inventory, the company has become the largest distributor of plumbing and PVF supplies in the U.S. and No. 3 in both HVAC/R, waterworks. It's also a major player in the integrated supply market, using its breadth of product to survive in a niche many distributors tried and abandoned back in the 1990s.

The company's fast-service Xpress stores initiative is geared to the residential market, serving the needs of local plumbers, remodelers and repair contractors. With a small footprint of around 4,000 square feet and inventory of about 3,000 high-volume items, customers can pick up what they need quickly and be on their way.

Ferguson also has several “blended” locations where it shares space with Wolseley's other major U.S. operating division, Stock Building Supply. These “Home Selections Showroom” locations allow builders, architects and remodelers to bring clients to a gallery featuring the latest in plumbing and building products, including appliances, cabinets, countertops, lighting, plumbing, doors, windows, hardware, custom millwork and moldings.