Sageworks Inc. released data today looking at how privately held residential remodelers and finishing contractors such as painters and flooring businesses are faring this year.  While privately held residential construction companies have seen sales decline by an average of 5.35 % in 2008, sales are still growing for residential remodelers (5.31% in 2008) and finishing contractors (7.43% in 2008).  Could the fact that it’s a buyer’s market be driving homeowners to stay in their current homes and fix up instead of move out?  The data is displayed below.  

Building Finishing Contractors (NAICS 2383): The types of businesses in this industry include painting, flooring, tile, carpentry and insulation contractors.  Sales growth increased for the average finishing contractor from 6.16% in ‘07 to 7.43% in ‘08.  The industry is not recession proof; the amount of time it takes to collect payment has increased from 47.63 days in 2007 to 51.4 days in 2008.  Net profit margins have decreased on average from 5.31% in 2007 to 3.74% in 2008. 

 Residential Remodelers (NAICS 236118): Sales growth for the average residential remodeler is at an average of 5.31% in 2008, down from 8.24% last year.  Residential remodelers are also not recession proof; the amount of time it takes to collect payment has increased from 15.22 days in 2007 to 22.09 days in 2008.  Net profit margins have increased from 6.98% in 2007 to 7.78% in 2008. 

 Businesses providing “need-to-haves” are faring relatively well this year. 

Sageworks released data today looking at the top 30 industries over the past 12 months by sales growth.  The ranking is below along with an outline of the types of privately held businesses that are found in the list. 

Health Care: Of the 30 industries listed, four are related to healthcare.  Home health care services saw sales grow an average 14.49% during the past 12 months.  Medical and diagnostic laboratories saw an average 13.12% growth in sales during the same time period.  The medical equipment and supplies manufacturing industry also experienced sales growth, up an average 12.26 percent.  Outpatient care centers saw an average 11.08% growth in sales over the past 12 months.   These health care industries are still growing, especially as generations such as the baby boomers are getting older.

Petroleum, Coal & Mining: Petroleum Wholesalers (16.31%) and Petroleum & Coal Products Manufacturers (12.97%) are both on the best-performing industries list.  Also, businesses providing support activities for Mining (17.76%) and Metal and Mineral Wholesalers (10.18%) fell in the top 25 industries by sales growth over the last 12 months. 

Waste Services: Businesses providing necessary services have proven to be relatively recession-proof; this may be because many of these services are contracted by cities and towns across the nation.  Remediation and Other Waste Management Services saw average sales growth of 14.85% over the past 12 months and Waste Collection companies saw sales grow by an average of 13.34% in the same period.

Technology & Telecommunications: Software Providers (14.18%), Other Telecommunications businesses (providers of specialized telecommunications applications, such as satellite tracking – 13.49%), and companies providing Computer Systems Design Services (10.77%) all fell in the top 25 industries by sales growth over the past 12 months.  Technology is still moving forward even as the economy slows. 

Agriculture: Farm Product Raw Material Wholesalers (21,7%), Cattle Ranching & Farming (19.45%), and businesses providing Support Activities for Agriculture & Forestry (13.44%) all grew at a healthy rate this year.  This may be attributable to the fact that agriculture-related industries are providing many “need-to-haves”. Crops and commodities are essential as a source of food and raw materials, so as the economy weakens and consumers are more watchful for bargains or scaling back to only things they need, industries involving farming should be some of the last to be affected by the pained economy.

 Accounting: Accounting, Tax Preparation, Bookkeeping and Payroll Services businesses grew at an average of 11.87% over the last 12 months.  With all of the skepticism about the future of banks and businesses, it is no wonder that accounting firms are growing their revenues this year.  An accountant or CPA, who is often a business owner’s closest advisor, is likely to be utilized during the current time to discuss how to manage a business in a tough economy; business owners may seek as much advice as possible to ensure that the bottom line stays above water. 

It appears that recessionary forces have intensified in the 4th quarter for the private retail trade sector.

According to Sageworks Private Sector Index, both accounts receivable and accounts payable days are at a record high based on a study of month over month comparisons for the last three years.

The average number of AR days, or average number of days to collect on accounts due has increased 40% from previous Oct readings, up to 18.82 from 13.48 average days. AP days are also up from 22.50 average days to 31.88, an increase of 41%.

More means less in this case, and the jump in accounts receivables and payable days indicates that retail businesses are receiving payment for goods sold more slowly, while also paying down their own bills much later.

In a recent report from the WSJ, late payments from customers of privately held retail businesses have not only affected revenue collections from sales, but have also detrimentally slowed down payments to suppliers.

Several retailers from Sageworks Index reporting increased receivables include:

Managing receivables is a key to maintaining strong cash flow in a small business, and data from Sageworks, Inc. shows that retailers have been troubled with substantial decreases in cash flow over recent months.

According to Sageworks Index, cash flow for private retailers as approximated by the EBITDA margin is currently down -10.98% as of Nov 1 over the trailing three months.

Increases in AR and AP days may also indicate that businesses have extended credit to buyers and/or may be taking advantage of trade credits from suppliers, but underlying problems now in retail are more closely related to general economic conditions where consumers are more pessimistic than ever. The Oct Univ Michigan/Reuters Consumer Index reported the strongest monthly movement in over half a century, down 12.7 points to 56.7. IHS global economist Brian Bethune recently commented, “The economy is now navigating through the eye of the storm, with recessionary forces intensifying in the fourth quarter of 2008,”

In a recent recent blog post titled, “I Repeat: It’s Not Just A “Wall Street Bailout”

Brian Sullivan of Fox Business reminded readers that the housing crisis is not an island to itself, and explained that there are a number of industries that all benefit from home transactions. Sageworks data agrees, and shows that industries related to home building and housing have all been adversely affected by the crisis.

When Sageworks, Inc.’s data was mined for those privately held industries with the slowest sales growth over the last 12 months, it confirmed that a number of housing related industries such as furniture stores, lumber wholesalers, and building materials companies now rank among industries reporting the slowest sales growth in the US over the last 12 months.

Those Industries listed in the top 10th percentile for the slowest sales growth over the last 12 months includes the following:

Brian Sullivan also explained that consumer spending was 70% of the economy, and much of that was related to housing. Historically, the ability to borrow and spend has tracked closely with real estate prices. With that in mind, watch retail spending and especially the auto industry (see previous post), where the consumers ability to borrow is directly related to auto sales.

Companies such as newspapers, news websites and social networking sites dependent on advertising dollars to make money may see a particular slow down as businesses cut unnecessary expenditures for fear of continued economic woes.  Sageworks Index of private company activity shows a downward trend in advertising dollars spent as a percent of sales from 2007 to 2008 for automobile dealers, restaurants and retail clothing stores.  

In light of this trend Brian Hamilton, CEO of Sageworks, remarked, “when companies feel threatened in an uncertain economic environment, they tend to cut discretionary expenses, one of which is advertising.  Unfortunately, this tends to further depress sales and profits, since good advertising efforts drive profits and sales.” 

The downward trend in advertising which is presumably due to tightened spending by businesses is similar to the downward trend being felt by retail stores due to tightened discretionary spending by consumers (see “Small and Large Retail Businesses Feel the Downturn“). 

See also: http://www.adotas.com/2008/09/report-display-down-6-year-over-year/ - On online advertising trends in 2008.

In the wake of current economic turmoil sales and profitability have both slowed significantly for retail businesses since last year.   Sales growth for privately held retail businesses has fallen in 2008 to 3.18% from 3.85% in 2007.  A similar trend is evident for publicly traded retail businesses; sales growth was at 3.72% in 2007 and is currently a dismal 0.32%.  Net profit margins for private clothing stores have dropped to 2.88% in 2008 from 3.46% in 2007; for publicly traded clothing stores average net profit margins are currently 5.55%, down from 6.81% in 2007. 

With rising prices for food, health care, energy, gasoline, etc., retail customers are left with fewer discretionary dollars to go towards retail spending. Consumers are pulling back on spending and focusing on the essentials. The fall in consumer confidence to near all time lows has caused a general slowdown throughout the economy, which also seems to be adversely affecting retailers. Rising energy and transportation costs are raising expenses in the retail industry, which is placing more strain on profit margins. Competition between retailers is currently intense, with superstores battling on price and direct marketers/online selling increasing competition to stores.

Net Profit Margins of Privately Held and Publicly Traded Clothing Stores From 2000-2008

Sageworks aggregates private company financial data from financial professionals that use our ProfitCents and Sageworks Analyst applications.

Related Links:

http://blogs.reuters.com/summits/category/consumer-retail-07/ - Reuters Summit Notebook Blog - consumer and retail analysis
http://www.nsba.biz/content/1993.shtml - NSBA Small Business Mid-Year Economic Report
http://abclocal.go.com/wls/story?section=news/consumer&id=6397582 - Holiday Retail Slump Expected
http://www.sageworksindex.com - Sageworks Data on Privately Held Companies

According to Sageworks’ industry data (shown below), privately-held companies have been taking on more debt relative to their sales and assets during the time period from 2003-2008. Liabilities to sales have climbed steadily from 1.03 at the beginning of this period to 3.30 in 2008.

Sageworks Inc. collects privately-held company data from financial professionals who subscribe to its Profitcents and Sageworks Analyst programs.  When financial reports are run through these programs, the data is collected and stored in anonymity. Industry data is provided in an aggregate format only, and no individual company information is released. Over one thousand reports are run daily, and new data is incorporated into the Sageworks industry statistics each day.

For more information on the increase of business debt and the impact of debt on the economy, visit:

• http://www.financialsense.com/editorials/hodges/2005/0619.html
• http://www.sba.gov/advo/research/rs327.pdf - “Small Business and Micro Business Lending in the United States for Data Years 2006-2007.”
• http://blog.washingtonpost.com/small-business/2008/06/number_of_small_business_loans.html - “Number of Small Business Loans Increase.”