After many months of cutting and consolidating to get their businesses right sized, a slow summer and a weak fall selling season is pushing some public builders to go under the knife again for another round of painful, if not as dramatic, cuts and consolidations.
To date, the public builders have drastically reduced their overhead cost structures by exiting less profitable markets, reducing excess staffing, consolidating operations, and even ridding the payroll of some big salaries. The net result has been a significant decrease in dollars allocated to SG&A.
However, as housing demand has waned, the builders have struggled to keep SG&A in line with falling revenues. Only recently have sales volumes proved robust enough to push builders' SG&A levels, as a percentage of revenue, down near historical levels. D.R. Horton, for example, finished out its second quarter with SG&A at 11.7% of revenues, compared to 16.3% the prior year.
But balance like that may be short lived. With third-quarter earnings season reaching a crescendo over the next couple of weeks, Wall Street expectations are that the publics' top-line revenue numbers will suffer, given that overall new-home sales levels have dropped to record lows following the expiration of the federal home buyer tax credit.
Although Toll Brothers benefited less from the tax credit than its entry-level and first-time move-up peers, Toll Brothers' management pointed to this likelihood in a 10-Q filing with the Securities and Exchange Commission for its fiscal third quarter ended July 31:
"We estimate a reduction in absolute dollars expended for SG&A in fiscal 2010's fourth quarter compared to fiscal 2009's fourth quarter, but we believe SG&A will be higher as a percentage of revenues due to the decline in projected revenues in the fiscal 2010 period as compared to the fiscal 2009 period [and] ... lower settlements in our fiscal 2010's fourth quarter than in fiscal 2010's third quarter."
More revenue slides suggest not only additional cost cuts and consolidation but also a possible redrawing of some companies' geographic footprints in an effect to gain scale and impact.
"The builders are going to cut and consolidate as much as they can. But I don't know that it's going to yield a huge delta," said David Goldberg, an analyst with UBS, of builders' cost reductions. "It's hard to move the needle at this point."
Already some builders are responding. Management at KB Home, for example, announced on Oct. 14 that it would consolidate two back office operations in the West, moving the accounting and administrative services for Denver to Phoenix.
This announcement followed a similar one announced during KB's second quarter earnings call. During the call, CEO Jeffrey Mezger announced that he expected about $5 million in annual savings to come from a consolidation of administrative positions in the company's southeast region, which includes North and South Carolina; Jacksonville, Fla.; and Washington, D.C.
In addition, he announced that the company also would be winding down its Charleston, S.C. operations.
Pulte Group also has been rumored to be making some operational cost-saving adjustments, although some reflect the company's continued digestion of Centex operations following its 2009 merger with the company. According to sources, Pulte recently consolidated from six regions to four. In the West, Phoenix and Las Vegas divisions were combined with the California operations and Mid-Atlantic operations were rolled into the Southern region, where Jacksonville, Tampa, and Orlando divisions were merged into a single division. However, at press time, the company was unable to confirm these changes.
Learn more about markets featured in this article: Charleston, SC.