Things should be looking up -- way, way up -- for kitchen and bathroom cabinetmaker American Woodmark Corp. of Winchester.
New-home sales in the United States hit a record in June. Sales of existing home also set a record. No surprise, then, that the home remodeling industry, crucial to any cabinetmaker's financial well-being, has been booming.
And last week, as if American Woodmark needed any more reason to cheer, its cabinets were featured on the home-decorating reality TV show "Queer Eye for the Straight Guy," publicity that's hard to buy.
Yet American Woodmark's profits dropped 11 percent from a year ago, according to the company's most recent quarterly report, mostly from the same culprit that has been bedeviling many Americans all year.
"It's those fuel prices," James J. "Jake" Gosa, American Woodmark chairman and chief executive, said in an interview last week. "The run-up in crude oil prices has affected us in a number of ways."
Few businesses in the Washington region depend on fuel as much as 25-year-old American Woodmark, which has 6,100 employees and 15 manufacturing facilities across the United States, each with specialized tasks and each requiring large trucks to haul away the cabinet components once they are made and assembled.
"Petrochemical costs account for a substantial portion of all of our costs," said Kent B. Guichard, the company's executive vice president. "A lot of what we do, after all, is move material. We are moving materials constantly between our plants and then ultimately to the consumer."
American Woodmark, the third-largest U.S. cabinet maker, hasn't had a general price increase this year, but Gosa suggested one may be on the way. "You have to pass on these costs," he said. His company targets middle-income homeowners willing to pay $100 to $200 -- or more if they want upgrades -- for a wall cabinet.
Typically, an American Woodmark cabinet ordered from a Lowe's or Home Depot in, say, Fairfax will be put together in four different plants, and its components will be hauled by as many as six trucks -- most of them 18-wheelers that won't win any awards for fuel efficiency.
From start to finish, it can be a diesel fuel-guzzling, zig-zagging, 1,500-mile journey from the forest in the Appalachian mountains where the trees are felled and the wood is chopped to the townhouse in Arlington where the cabinets are installed.
American Woodmark is selling lots of cabinets. That's not the problem.
The company, which has 1,000 employees in the Washington region, had sales of $777 million in the fiscal year that ended April 30, a 16 percent increase over the previous year.
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.
American Woodmark can play hardball, too. It has not renewed contracts with several truck carriers this year "to avoid the prospect of extremely large rate increases," the company's chief financial officer, Jonathan H. Wolk, has told Wall Street analysts.
It isn't just transportation costs, though, that have burrowed deeply into American Woodmark's bottom line. The company uses fuel -- and products derived from oil -- for other purposes.
American Woodmark relies on heavy equipment to cut down trees, for example. And the equipment generally is powered by gas.
Most of the finishes on its kitchen cabinets, finishes with MTVish names such as Tawny and Spice, have a petrochemical base. So do glues used in the assembly process.
As the U.S. dollar has weakened against the euro, "other raw materials such as [imported] steel have gone up, too," Guichard said. "So have our hinges and other metal components. Particle board is higher than it was a year ago. Cardboard is, too."
It's enough to make a chief executive, even one who's supposedly on vacation, sound like the star of a Rolaids commercial.
"We just need some relief," Gosa said the other morning, before heading out to play a round of golf.
For many American companies, petro worries have become a way of life.
Michigan-based Masco Corp., the top U.S. cabinetmaker, cited higher energy costs as one reason its latest quarterly earnings were down 12 percent from a year earlier.
American Woodmark's neighbor, Winchester-based Trex Company Inc., which makes composite deck and railing products, posted a $1 million loss in its latest quarter, partly because of the increased price of polyethylene, a fuel derivative it uses in its products.
FedEx Freight has announced a general rate increase for some truck deliveries, and major steamship companies are raising their fuel surcharges to furniture importers.
In the retail sector, Home Depot upped its general delivery fee in the Washington region from $65 to $75 in May.
And beginning Sept. 1, AAA Mid-Atlantic plans to reduce the rebate it offers on gasoline purchases made by its Visa cardholders to 3 percent from 5 percent "due to the increased fuel price trends."
American Woodmark has been struggling to find a way to pass along these higher costs to its customers. As the beleaguered airline industry knows only too well, that's a dicey proposition. Set the price too high and fewer people will buy the product. Set the price too low and the company's profit could disappear.
"The question is: How do you do it?" Guichard said. "You are constantly walking that fine line, supporting the marketplace and getting what you want out of the marketplace in terms of pricing and the volume of business that you are getting. When you live in a competitive world, I mean, that's always the trick: How can you keep your growth up and your volumes up and still make an adequate return?
"Historically, it takes somebody in the industry to say: 'I have had enough of this.' Then they announce a price increase and the industry says, 'Wooooof! I'm glad somebody did that.' And we all follow."
In the end, American Woodmark chairman Gosa told analysts in June, his industry is transitioning from a non-inflationary environment to one that's decidedly inflationary, where everything is more expensive.
Guichard, in the interview last week, said customers should get used to that idea, too.
"We are back in an inflationary world where prices will go up from year to year," he said. "So we all need to reset our brains."
Ediel Estrada loads cabinets. Typically, American Woodmark pieces cabinets together from four different plants, and pays a premium for fast shipments.