Distributor Sales Outlook: What to Expect, and Tools to Help You Stay Afloat

BY Tim Fisher
4/23/2020 - HVAC Market Intelligence , COVID-19

The past eight weeks have been a dizzying time to track the news, and more specifically, economic data. Here are just a few of the data points reflecting the mind-boggling economic shifts we’ve endured since February 19th:

  • The S&P 500 dropped 34 percent.
  • The S&P 500 rallied 28 percent.
  • The national unemployment rate matched a 50-year low (3.5 percent).
  • The national unemployment rate reached an 80-year high (HARDI estimate: 15 percent).
  • The Michigan Consumer Sentiment Index experienced its largest one-month drop in history (18.1 points).
  • Manufacturing output experienced its largest one-month drop in 74 years (6.3 percent).
  • Oil prices reached their lowest point in 21-years, and briefly went negative for the first time in history.

This list could go on, but you get the point. While industries protected from stay-at-home orders – like those in the HVACR industry – have fared better than others, the deep economic decline caused by The Great Shutdown is still hurting HARDI members. The HARDI Weekly Pulse Survey, launched two-weeks ago, has offered good insight into how our members are weathering the economic storm. The first survey, which generated 98 responses from distributors, offered the following insights:

Week of April 9th

  • 57 percent of distributors reported that their sales were down more than 5 percent from the previous week.
  • 52 percent of distributors indicated that they had either cut employee hours or furloughed/laid-off staff.
  • 52 percent of distributors reported having customers request extended payment terms.

The second Weekly Pulse Survey, which generated 128 distributor responses, revealed the following:

Week of April 13th

  • 40 percent of distributors reported that their sales were down between 5 and 20 percent from the previous week.
  • 10 percent of distributors reported a weekly sales decline of 20 – 30 percent.
  • 8 percent reported a weekly sales decline of 30 – 40 percent.
  • 9 percent reported declines of 40 – 50 percent.
  • 5 percent reported declines of greater than 50 percent.
  • 42 percent reported either cutting employee hours or furloughing/laying-off staff
  • 42 percent reported having customers request extended payment terms.
  • 17 percent reported that customer payment has deteriorated to the point that it’s causing a negative impact on their operations.

While disheartening, the responses coming from HARDI distributor members square with what we’re hearing from other sources about the current state of wholesale distribution. Results from a recent Industry Insights survey showed that 83 percent of surveyed distributors (out of 432 participants) had experienced a direct, negative financial impact from the Covid-19 outbreak and economic shutdown. Likewise, through their Weekly Pandemic Review Index, Indian River Consulting Group (ICRG) reports that wholesale distributors have averaged a 15 percent decline in weekly sales since March 16th when compared with the same period last year. For the HVACR industry as a whole, JP Morgan reports that through the first quarter of 2020 resi revenues among manufacturers are down 5 percent, commercial revenues are up 3 percent, and refrigeration revenues are down double-digits. For the year, manufacturers expect resi sales to be down 14-16 percent and 25 percent in commercial unitary and refrigeration markets.

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HARDI’s own internal analysis, summarized in the chart above, indicates HVACR distributor sales will be down between 13 and 14 percent for the year, with the biggest declines coming in the third quarter. Although we predict single digit increases in cooling degree days during the summer months, favorable weather is unlikely to offset the historic declines in consumer confidence and personal spending, which we’re projecting to drive a 13 percent decline in residential demand for cooling equipment (as outlined in greater detail here).

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Given the projected decline in sales, and the likelihood that a growing number of contractors will be unable to make their payments, HARDI distributor members should begin stress-testing their businesses and evaluating how they can stay liquid in the months ahead. A great first step in assessing your financial stability is to lean on the industry benchmarks established in TRENDS, our monthly distributor sales survey, and the Distributor Performance Dashboards (DPD) tool, an annual benchmarking survey that helps distributors find the strengths and weaknesses in their financial and operational strategies. Additionally, distributors should utilize this free stress-test tool, created by the team at Indian River Consulting, to model the cash-flow implications of an extended period of depressed sales. Here’s how the IRCG stress-test tool works:

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  1. Data should be entered for each month from January 2019 through March 2020, but only in the yellow shaded cells.
  2. The model uses average daily sales to normalize month-to-month sales change.
  3. Sales values should include discounts given to customers and other standard adjustments.
  4. COGS should include discounts earned and inbound freight and other standard adjustments. Rebates can be applied here or in other income.
  5. All expenses should be entered among these six options. User has discretion on where expenses should be applied.
  6. Select cost type as described in footnote and also in the Instructions tab.
  7. Interest income and gain/loss on sales of assets should be included here. Rebates and interest paid can be entered here if not entered elsewhere.

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  1. Nothing from this tab is used in any model calculations. This tab is provided for use as a reference when considering headcount related adjustments relative to changes in revenues.
  2. Enter total company wages (all gross W2 amounts) and enter total benefit costs and payroll related taxes. This ratio will be used to estimate burden cost.
  3. Feel free to overwrite the functional areas listed and use only the rows you need.
  4. Enter number of employees for each function.
  5. Enter total annual wages (sum of annual wages) for each function.
  6. Total cost is the sum of Total Wages and Estimated Burden Cost. The sum of Total Cost should resemble the sum of the two payroll amounts entered at the top.

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  1. This tab provides a baseline on profit impacts, which will be used as part of the cash calculation when revenue projections are entered. Descriptions of the calculations used can be found on the Instructions tab.
  2. Enter revenue projections in the shaded cells relative to the same month from the prior year. Average daily sales are used for sales and expense calculations.
  3. Net profit before tax is considered cash, so if material amounts of depreciation are recorded it would make sense to exclude those.

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  1. Enter values from the February month-ending balance sheet accounts for Cash, Accounts Receivable (trade), Inventory, and Accounts Payable (to suppliers).
  2. If additional cash, such as paid in capital, is expected to be infused into the business, enter the amount in the appropriate month.
  3. If additional debt is expected to be acquired, enter the corresponding interest expense for each month upon which it will be payable.
  4. If cash is expected to be used outside of inventory, A/R, A/P, and operating expenses (including interest), enter in the month(s) upon which it is expected to occur.
  5. Cash balances are estimated through February 2021 based on net income and expected adjustments to working capital accounts (plus those mentioned in bullets B, C, and D above). Details on these calculations can be found on the Instructions tab.

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  1. The top four values are calculations displaying cash impacts from adjustments made to gross margin, expense and working capital adjustments made on this tab.
  2. Cash Adjustment shows the cumulative cash impacts from the changes made on this tab. Gross Margin and Expense adjustments carry-forward, while working capital adjustments are one-time occurrences (see Instruction tab for more details).
  3. Changes in gross margin should be entered as basis points (100 basis points = 1 percent). A positive value will increase margin.
  4. Changes in expense levels should be entered as dollars. A decrease in expenses should be preceded by a negative sign (“-“).

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  1. The top of this illustration is the same as the previous image. Rows 48 through 62 above are found below the margin and expense adjustments on the Modeling tab, which are described on the Modeling (1 of 2) outline. Please note: all adjustments to working capital accounts will show only in the month they occur; unlike the gross margin and expense adjustments they do not generate changes in subsequent months.
  2. If you expect accounts receivable days to increase due to customers not paying their bills promptly, enter a positive value. If you believe you will be able to shorten days sales outstanding, enter a negative value.
  3. If you want to estimate additional cash available from paying vendors in a longer period of time, enter the number of days you plan on extending as a positive number.
  4. Use days increase or decrease to estimate the impact of inventory changes. Note that days inventory will change as sales decline. The formula is calculated using days sales in the denominator.

The steps for using the IRCG cash flow model come directly from an informational webinar IRCG recently hosted to explain the tool. For distributors interested in accessing the cash flow model, you can find it easily on the IRCG website or download directly via this link. Additionally, for distributors interested in participating in one of our benchmarking programs, please contact either myself or Brian Loftus to help get you started.

For questions and more information reach out to Tim Fisher, or visit our COVID-19 resources page for more.