Hughes Supply reported net sales of $774.7 million for the second quarter ended Aug. 2, down 3.9% from $806.3 million last year.

Hughes Supply (Orlando, Fla.) reported net sales of $774.7 million for the second quarter ended Aug. 2, down 3.9% from $806.3 million last year. Net income increased 25.8% to $18.5 million vs. $14.7 for the same period last year.

The increase in net income resulted from a 7% reduction in headcount, which contributed to lower selling, general and administrative expenses, as well as better management of inventory, which enabled the wholesaler to pay down debt and record lower interest expense, according to David Hughes. Hughes, chairman/chief executive officer of Hughes Supply, discussed the company's financial performance in a conference call with analysts in August. Tom Morgan, president/chief operating officer, and Steve Zepf, chief financial officer, also participated in the conference call.

Comparisons of branch sales vs. building permits indicated that Hughes is gaining market share in key markets such as Texas, Florida and Georgia, Hughes said.

"Florida, which represents 24% of our sales, recorded a 5% drop in building permits compared to a 3% drop for our stores," he noted.

At the end of the second quarter Hughes had 7,044 employees, down 7% vs. 7,546 at the end of last year's second quarter, Zepf said.

Hughes Supply will close its Atlanta distribution center that serves its plumbing and HVAC branches, Morgan said.

"This will erase about $1.5 million in annual costs without interruption of service to our branches," he noted. "Going forward, our branches will be serviced by three other distribution centers in Texas, Florida and North Carolina."

In other news, Hughes expects to receive GSA certification before December, which will allow the wholesaler to participate more actively in the federal government arena, Morgan said.

"We put together an alliance of vendors and we're now moving forward," he added.

Potential sales in that arena could be in the tens of millions, he noted. The wholesaler has identified about 30 branches across the country that will be the primary suppliers of products as it wins bids, he said.

Acquisitions

Hughes Supply's acquisition of Utiliserve from Co-Tennessee at the end of July made the wholesaler the No. 2 two player in the utility distribution landscape, Morgan said.

"In acquiring Utiliserve we got strong leadership, solid industry experience, a good business model that could be leveraged, and a perfect geographical fit to the Hughes Utility Group," he noted. "Rick McClure of Utiliserve will run our Utility Group and report to Skip Hughes, our group president."

"We are not actively in pursuit of acquisitions at this time, but we do plan on taking advantage of strategic opportunities as they arise," Morgan said.

Gross Margin

Hughes Supply's gross margin for the second quarter was 23.3% vs. 22.4% in last year's second quarter, Zepf said. This resulted from improved selling margins, increases in vendor rebate programs, the closure of lower margin under-performing branches, more focused purchasing and a more proactive management in this position of slower moving inventory items, he said.

"Selling margin improvement came about as a result of a shift in the sales mix, with a larger proportion of out of stock sales vs. direct shipments, matrix pricing and improved stainless steel pricing in Hughes' Industrial Group," Zepf said.

Group Performance

Hughes Supply's Electrical and Plumbing Group reported lower sales for the second quarter, $354 million vs. $387 million last year, but an increase in gross margin, Zepf said. He attributed this to a change in the sales mix, weighted more toward the higher margin out-of-stock sales; the closure of lower margin under-performing branches in fiscal 2002; and the impacts of matrix pricing.

Hughes Supply's Industrial Pipe Valve and Fitting Group had net sales in the second quarter of $77 million vs. $81 million last year, but also showed an increase in gross margin. Zepf noted that plant utilization in the petrochemical, pulp and paper and other industries has declined, and so has the demand for plant maintenance supplies. Sales were also affected by the closure of two satellite branches last year. However, the Industrial Group was able to raise its prices on certain commodity-based products. Overall, nickel pricing improved by about 4% during the quarter compared to the prior year's second quarter, which helped gross margins.

Hughes Supply's Building Materials, Water and Sewer Group had second quarter sales of $343 million vs. $338 million last year and achieved a higher gross margin.

Third Quarter Outlook

Hughes Supply is projecting sales growth ranging from slightly down to slightly up for the third quarter, Zepf said.

A recovery in sales for non-residential construction is not expected until next year at this time, Hughes said. Industrial construction in particular, including office buildings, hotels and motels and other commercial buildings, has suffered a slowdown, he said.

For the second quarter, non-residential construction was at its lowest level since January 2002, falling 3.4% below May's figure, he noted.

"This puts non-residential construction at 20% below the levels of June 2001. This is about the same percentage decline that we saw back at the bottom of the 1990-91 recession," Hughes said.

The housing sector is expected to remain healthy, as favorable demographics and low interest rates continue to support the housing sector, he noted.

"Regardless of the economic indicators, we believe that there are opportunities in the marketplace for Hughes," Morgan said. "As long as our competition has business, we have opportunities, and we plan to work hard to leverage them."