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Nailed by Higher Fuel Costs
American Woodmark depends on employees such as forklift driver Dave Wiley to quickly move cabinet pieces among 15 manufacturing locations.
(By Jonathan Ernst For The Washington Post)
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About two-thirds of its sales are to homeowners who are remodeling; the rest are to new-home builders. New-home sales in the United States in June hit a record 1.37 million on an annual pace, according to government statistics released last week. Existing home sales also set a record, jumping 2.7 percent from May to a seasonally adjusted annual rate of 7.33 million in June, the National Association of Realtors said.
American Woodmark rode the wave of the housing frenzy, around the nation and in Washington, which Gosa calls "maybe the best housing market in the world year-in and year-out. It's incredibly resilient."
But that last bump up to $60-a-barrel oil was too much. That's one reason the company's latest quarterly profits, announced on June 7, dropped 11 percent to $7.5 million from the comparable period a year earlier.
"When crude oil was 37 dollars or 38 dollars or 40 bucks, you used to think: Well, that's kind of a historical high," Gosa said by phone from Boca Raton, Fla., where he was taking a vacation. "But when we went to 50 dollars, you thought: Well, it'll settle down again. But then it goes on to 60 dollars -- I mean, I don't really understand that. No, I didn't see that coming. I don't know anybody who did."
Investors haven't taken a huge hit: the company's shares on the Nasdaq Stock Market have dipped just 2.3 percent from the beginning of this year.
Industry analyst Joel K. Havard of BB&T Capital Markets still rates the stock a "buy," writing in a research note in June: "We view American Woodmark as a quality business undergoing a discrete set of operational challenges," such as inefficiencies created by the opening of new plants, higher prices for the raw materials used to make cabinets and, of course, that spike in transportation costs. BB&T does business with American Woodmark.
American Woodmark can't control the price of oil, but it does have some say in what it pays the 15 or 20 trucking companies it deals with regularly.
The manufacturer negotiates a base transportation rate with each trucking company, plus a surcharge that's paid if the fuel price rises above the agreed-upon figure. (Diesel fuel was retailing at about $2.50 a gallon last month, up from $1.80 a year ago and $1.45 two years ago, though trucking firms generally buy at lower wholesale prices.)
Havard said American Woodmark spends up to twice as much on shipping costs as its competitors because it demands faster service.
The trucking industry, challenged by fuel prices, bankruptcies, driver shortages and Transportation Department rules that since last year have limited the number of hours drivers can stay on the highway, also finds itself in a tug-of-war, at times, with the shippers.
"We have our own fuel surcharge and some shippers do too," said James E. Ward, president of D.M. Bowman Inc., a Williamsport, Md., firm that has been hauling American Woodmark products since 1982.
If the shippers are unwilling to pay Bowman's surcharge, Ward said he increases the basic transportation rate. "Ultimately, the fuel surcharge is passed on to the shipper and then to the consumer," he said.
