When the CEO of Stock Building Supply talks about how his company has changed since emerging from bankruptcy, he sounds like a man who knows firsthand the dangers of easy credit.
"We've changed our orientation to cash," Joe Appelmann said this week in an interview at Stock's North Raleigh headquarters. "We have a pristine balance sheet with no debt. We've simplified the business and focused on what we're good at."
A Stock veteran of 22 years who took over as CEO in 2007, Appelmann is not shy about discussing what led the 87-year-old company to nearly collapse last year.
Although Stock's business -- selling windows, doors, roofing and other housing material -- largely dried up when the housing market collapsed, the company's problems were exacerbated by its penchant for growing through acquisitions.
Stock's former British parent, Wolseley Plc, used cheap credit to gobble up dozens of companies in a failed attempt to diversify beyond Stock's specialty of residential construction.
"We bought a rebar business in Florida," said Appelmann, 51. "We certainly didn't know the rebar business."
Stock, which lost $246 million in 2008, was rescued in May when The Gores Group, a California private equity firm, bought a 51 percent stake from Wolseley. After a trip into bankruptcy that lasted 57 days, Stock emerged much smaller and more narrowly focused. The ordeal was hardest on the thousands of Stock employees who were let go while the company struggled to survive.
"Did we want to go from 16,000 people to 3,000? No, we didn't," Appelmann said. "But that's the reality of a housing market that's down 80 percent from its peak. You don't have a choice."
Stock has abandoned efforts to diversify beyond residential construction and has left 28 markets that represented a third of the company's sales. Its remaining 100locations are in 19 U.S. markets.
Those markets, which include the Triangle, the Triad and Charlotte, are places where the company thinks it can break even by summer.
Stock's employee count in the Triangle is 555, down from 1,100 at its peak.
As it attempts to regain its footing, Stock faces a residential construction industry that has shrunk dramatically. Between the first quarter of 2006 and the first quarter of 2009, the number of single-family homes being built in the U.S. dropped from 1.7 million to 360,000, according to census data.
Even as the housing market starts to recover, more firms could fall by the wayside, said David Manthey, a senior research analyst who covers the sector for Milwaukee-based Baird Research. "You may still have a problem where there's too much capacity chasing too little supply," he said. "It's an industry that still has a lot of challenges, to say the least."
The decline of the housing market and the credit crisis have put many small and midsize home builders out of business, reducing the customer base for Stock's products.
While the number of new housing starts is expected to rise this year, the trend is toward smaller homes. For Stock, that means fewer sales of high-margin products such as windows, doors, roofing, siding and cabinets.
The company is also getting squeezed on its lowest margin item: lumber. About a third of Stock's sales are directly tied to commodity prices. The fall-off in housing starts coincided with an influx of Canadian and U.S. lumber, which caused lumber prices to be cut in half from 2007 levels. "It's been kind of getting hit on both sides," Appelmann said.
Stock and other suppliers will need to adjust to the new landscape the same way that home builders will, said Tim Minton, executive vice president of the Home Builders Association of Raleigh-Wake County.
"There are lots of business opportunities out there; it's just being smart to know where the trends are," he said. "The green building stuff is holding its own, even with price considerations."
As one of the larger suppliers of residential materials in the country, Minton said, Stock is in a position to grab market share.
Stock has the advantage of being flush with cash, thanks to a $75 million infusion from The Gores Group. The company's cash position also improved when it sold off inventory and closed out accounts in the 28 markets it left.
Stock is continuing to divest itself of pieces that don't align with its focus. On Wednesday, the company announced that it had sold a New Jersey roofing-and-siding company that it bought in 2006.
Appelmann said Stock is on the prowl for acquisition targets, though he is quick to note that the company will be much more selective this time around.
"It's about buying at the right time in the cycle," Appelmann said. "We bought a lot on the way up. It'd be nice to buy some right."
Stock likely will be sold or taken public in the next few years. The Gores Group holds its companies, on average, for 36 months before it cashes out.
Appelmann is among those who think the recovery in the housing sector will happen gradually over several years. But Stock has begun adding employees after years of slashing jobs, including a marketing director in Raleigh.
"You still have to watch your expenses," Appelmann said. "But we know we have to build the right bench of talent as we get into 2011 and 2012."
