Beacon Roofing Supply, Inc. (BECN Quick QuoteBECN - Free Report) is gaining from continued focus on enhancing digital platforms, disciplined cost management efforts and strategic initiatives. Also, a robust residential backdrop is expected to drive growth.

However, inflationary pressure, coronavirus-related woes and stiff competition remain concerns. Also, weather-related challenges may jeopardize its profitability.  Let’s delve deeper.

Factors Driving Growth

Continuous Focus on Productivity Enhancement & Digital Space: Beacon Roofing remains focused on its employees with additional tools and training enhancing overall productivity, including TRI-BUILT private label offering. Also, the company is targeting a new customer base, which includes building bonds with national accounts, large retailers and 2-step customers.

Notably, the company is gaining strength from the successful implementation of technology in the developing e-commerce platform. The company’s digital platform achieved 10% of the its sales during fiscal 2020. It is on track with the long-term target of generating $1-billion annual digital sales. During third-quarter fiscal 2021, the company witnessed rising adoption rates across its digital platforms. The company had nearly 50% more active users of its online platform in the third quarter fiscal of 2021 than last year. Digital sales contributed to 14% of the company’s net sales during third-quarter fiscal 2021.

Cost-Cutting Efforts: Beacon Roofing is moving forward with the integration of the Allied Building Products acquisition. The company is taking various initiatives to secure the best supply arrangement from vendors on a market-by-market basis. The company is also going through an employee transition phase and this process has just started to contribute positively to a reduction in operating costs. During third-quarter fiscal 2021, the company’s gross margin of 27.6% improved 380 basis points (bps) year over year and adjusted EBITDA margin improved 390 bps year over year. This upside is mainly attributable to the successful implementation of price increase, strong demand, and cost-control strategies. During the same period, SG&A expenses as a percentage of net sales contracted to 15.8% or 20 bps from a year ago. For fiscal 2021, the company expects adjusted EBITDA in the range of $635-$650 million from continuing operations, reflecting a significant increase from $399 million pro-forma adjusted EBITDA in fiscal 2020. Relentless cost-reduction and productivity initiatives helped the company reduce operating expenses and optimize margins.

Focus on Core Business: In a bid to enhance financial flexibility and sharpen focus on the core exteriors business, Beacon Roofing divested the Interior Products business. This will help the company return to its legacy position as a focused leader with an exterior building products distribution. Notably, 80-85% of the company’s continuing business will be within residential and commercial roofing. Last year, the company undertook a strategic review decision. Under this, the company integrated 40 brands across the United States and Canada that sell exterior products under Beacon Building Products. The company’s strategic decisions continue to gain momentum and are delivering measurable results. The company’s primary growth plan includes improved sales growth, operational efficiency and profitability. In line with its plan, the company remains focused on four key strategic initiatives — organic growth, digital, OTC (On-Time and Complete) and branch operating performance — that have been boosting sales and helping improve operating profitability. Furthermore, the company prioritizes improving sales and operating performance at exterior and interior branches, and intends to enhance overall customer experience with increased scope and scale of business. It is improving sales and operating performance at exterior and interior branches and intends to enhance overall customer experience with increased scope and scale of business.

Robust R&R Activity: Of late, Beacon Roofing has been observing an increased demand for housing and repair and remodel activities amid COVID-related restrictions. Housing markets have been showing resilience of late, given low mortgage rates. With the opening of the economy, demand for housing and building material products is improving, given the increasing trend of consumers to invest more in homes amid the pandemic. The momentum is expected to continue, which in turn will boost demand for Beacon Roofing’s products. The revival of housing demand has been a boon for Beacon Roofing and other industry players like Builders FirstSource, Inc. (BLDR Quick QuoteBLDR - Free Report) , Fastenal Company (FAST Quick QuoteFAST - Free Report) and Lowe's Companies, Inc. (LOW Quick QuoteLOW - Free Report) .

Concerns

Beacon Roofing’s work is performed outdoors and is based on repair and remodeling activity. It is vulnerable to COVID-induced economic disruptions. About 70-75% of overall sales and more than 80% of the roofing business is R&R-based and largely non-discretionary. Though the company has regained financial strength and operational flexibility, COVID-related restrictions may still weigh on its results. During third-quarter fiscal 2021, Beacon Roofing incurred $0.4 million in SG&A expenses related to the pandemic.

Of late, the company has been observing higher input costs. Despite undertaking various cost-saving initiatives, the company continues to see inflationary pressure across most product categories. During third-quarter fiscal 2021, the company’s cost increases for several product categories.