US independent hardware stores, home centers, lumber and building materials retailers seeing sales, profit trends moving in positive direction in fiscal 2012, with hardware stores seeing highest per-store sales volume, home centers lowest, finds study

Cindy Allen

December 30, 2013 (Hardware Retailing) – The 2013 Cost of Doing Business study presents the North American Retail Hardware Association's (NRHA) annual financial and operational profile of independent hardware stores, home centers and lumber/building materials outlets.

This study assesses the financial performance of home improvement retailers who graciously submitted confidential financial reports for fiscal year 2012 to NRHA. The study presents composite income statements and balance sheets plus averages for key financial performance ratios.

The data is segmented for hardware stores, home centers and lumber/building materials outlets. In each segment, data is presented for the typical store, for high-profit stores, for single-unit and multiple-unit companies and for sales volume categories. In addition, there is a five-year historical trend for typical stores in each segment.

Retailers can use this data to measure their own performance against industry averages. The data sets benchmarks retailers can use to establish financial plans to improve profitability.

Methodology

The annual NRHA Cost of Doing Business study is made possible through the cooperation of hardware store, home center and lumber/building materials outlet owners and managers who provide detailed financial and operational information about their individual companies.

Questionnaires were mailed to a sampling of hardware stores, home centers and lumber outlets in the U.S. to collect detailed financial and operational information for 2012.

The analysis in this report is the result of extensive review by NRHA. All individual company responses are completely confidential.

Most of the figures in this report are medians. The median for a particular calculation is the middle number of all values reported when arranged from lowest to highest. The median represents the typical company's results and is not influenced by extremely high or low reports.

To determine high-profit stores, all participating companies were ranked based on net profit before taxes. The high-profit companies in each segment are those that make up the top 25 percent. The figures reported for each of the high-profit segments represent the median for that group.

Key Findings

Independent hardware stores, home centers and lumber and building materials (LBM) retailers participating in NRHA's 2013 Cost of Doing Business study continue to see trends moving in a positive direction from both a sales and profit perspective as economic conditions slowly continue to improve.

Hardware Stores

For hardware stores in the study, the segment had the highest per-store sales volume ($1,439,052) and highest sales per customer ($18) since NRHA began to conduct the study. However, as rising costs of goods have continued to affect the industry, hardware stores saw their overall cost of goods rise to the highest level (60.7 percent) since 2001, which resulted in the lowest gross margin (40.6 percent) reported since 2006. With better expense controls in place than in years past, however, hardware stores were able to produce the lowest total operating expense figure (39.5 percent) in the past six years, which contributed to bottom-line profitability being up over figures reported in the 2012 study. This drove hardware store return on net worth to 8.7 percent of sales, its highest level since 2006.

Home Centers

In sharp contrast, home centers participating in the study had the lowest sales volume per store ($2,821,051) since 2000, with a significant drop in customer counts compared to last year's study. In the 2013 Cost of Doing Business study, only 78,000 customers patronized these businesses, one of the lowest levels seen in more than 20 years. This drop in customer count was coupled with a $2 drop in average transaction, putting added top-line pressure on home centers participating in this year's study. However, despite the challenges these stores continue to face to attract customers, home centers reporting prior year sales did show a year-over-year sale increase. Home center participants also found a way to drive profitability and return on net worth to 12.8 percent of sales, which was one of the best returns since 2002. This largely stemmed from a group reporting a 38.3-percent gross margin, which drove a 3.2-percent profit at the bottom line, one of the best profit performances reported by home center participants since the study began.

In stride with improving remodeling and new home construction data over the past two years,

Lumber and Building Materials

LBM retailers in the study also saw sales and profits continue to increase over last year. Although customer counts dropped over the prior year and remain at historically low levels, they are starting to return to levels seen in 2007 and 2008, prior to the recession and housing collapse. With a rise in average sales per customer to an all-time high of $141, LBM retailers produced the highest sales volume per store since the study began, coming in at $4,403,081 for fiscal year 2012. This, in turn, helped drive a healthy bottom line of 2.4 percent, as well as the highest return on net worth (11.4 percent) since 1999. Further supporting the continued turnaround of the housing market, LBM retailers continue to staff up to meet increased business activity, as demonstrated by the increased head counts of 1.5 FTEs (Full-Time Equivalents) and an increase in payroll of $4,812 per employee.

This increase, along with rising customer counts, generated the highest sales volume per store ever for the hardware category at $1,439,052. High-profit hardware stores also recorded a $1 increase in average transaction over figures in the 2012 study. The fact that the high-profit stores had 12 percent more transactions than a typical store meant that sales volume per store for high-profit hardware stores outpaced the typical store by 18 percent.

Cost of goods sold crept up more than a full percentage point for the typical store (60.7 percent in the 2013 study versus 59.4 percent in 2012) and Increased roughly the same amount for the high-profit group (59 percent this year versus 57.8 percent last year). Because high-profit stores were able to control expenses more effectively, however, they produced a bottom line profit three times that of a typical store (6.3 percent high profit versus 2.1 percent typical). The typical store generated slightly more than a half a point (.60 percent) in additional profit compared to a year ago. Also reflective of an improving industry is the fact that both typical stores and high-profit stores are staffing up. Typical stores added two people to their per-store head count while high profits added one. Even so, hardware stores continued to keep employee expenses, such as payroll per employee, in check as this figure decreased over the prior year.

On the balance sheet, high profits have a much better cash position than typical stores (10.6 percent vs. 5.9 percent) with less inventory on hand. The lower Inventory levels likely support better internal controls that lead to the higher profit margins at high-profit locations. Also In regard to inventory, high-profit stores saw inventory turns of 2.2 times while typical stores turned inventory just 1.8 times.

How to Use This Report

The Industry Annual Report presents financial and operational data that retailers can use to evaluate their own businesses and plan strategic changes. Here are ways to use the information in this report effectively.

* Determine your expenses as a percent of sales and calculate your balance sheet as a percent of total assets. Compare your numbers to the study results for both typical and high-profit stores.

* Don't look at percentages alone. Compare your real-dollar expenditures as well.

* Compare your numbers to stores of a similar size. Don't limit your comparison to one type of store. Defining hardware stores, home centers and lumber outlets is practical for statistical purposes, but your store may have attributes of more than one type.

* When your numbers differ significantly, determine the cause. Then develop a plan to bring your numbers more in line with high-profit stores.

* Although high profits have little to do with size, sales growth is one of the keys to profitability. Remember, there are basically four ways to generate additional revenue--traffic count, closure rate, transaction size and margins.

While reviewing the numbers on the following pages, it is extremely important to note that each year this report contains figures from a different sample group of stores. That means overall figures have the potential to vary widely from year to year based on the respondent group of stores participating each year. We use year-to-year comparisons to illustrate general trends over time, not to draw specific year-over-year conclusions.

For the entire Cost of Doing Business study, contact NRHA Member Services at (800) 772-4424.
(c) 2013 National Retail Hardware Association

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