It was a tough week for several Consumer Hardlines WTR stock indexes. The Commercial/Contract Furniture Index was off 4.6%, while the Home Goods Retailers Index fell 6.8% versus the four benchmarks (down between 0.8% and 3.4% for the week).

The relative bright spot was Residential, which was down only 0.7%. Yet the two reporting issues in Residential did not enjoy the week. Lovesac (-19.7% for the week) continues to gain market share, while Hooker (-16.7% for the week) confirmed exceptionally soft industry demand in its 4QFY24 report.

The 2024 High Point Market for manufacturers, marketers, and retailers. The current weak consumer demand keynoted all discussions. After the post-COVID demand surge, demand turned down in 2023 and continued through early 2024. Demand swings like this make it very difficult to profitably manage production. Factories work effectively with steady and predictable order flows and best with strong backlogs to ensure long runs and fixed cost absorption. The post-surge demand fall-off, conversely, pressures margins as fixed costs loom larger. Most management teams recognize these challenges and talk about the need to ‘right-size’ footprints to reflect the current reality.

“Prediction is hard, especially when it’s about the future” (variously attributed). When it comes to the near-term future of the consumer, the executives we spoke with pointed to: (1) inflation still taking sizeable chunks out of consumers’ wallets; (2) economic and geopolitical uncertainties fostering weak consumer demand; and (3) high interest rates (affecting mortgage affordability, keeping housing sales weak and, in turn, furniture demand). Almost as an afterthought, they added that demand in a presidential election year is almost always “iffy.”

Despite the near-term uncertainties, the leaders we spoke with were focused internally – controlling what they can control. This included action to ‘right-size’ production and other initiatives to position their companies for the future. We saw new products, with some firms pursuing new market segments and market categories. We saw new modular seating, emulating Lovesac’s reconfigurable, modular form factor. Flexsteel’s Zecliner targets the 7% of Americans who choose not to sleep on conventional mattresses. As noted last week, we examined Bassett’s recently launched Design Studio model that aims to deepen its third-party distribution platform. These kinds of actions/initiatives promise to enhance earnings once demand returns and operating leverage kicks in.

Longer-term headwinds? JPMorgan Chase CEO Jamie Dimon believes inflation may be higher forever (gated) due to structural factors (deficits, reshoring, government spending priorities). Meredith Whitney suggests slower household formation and the trend toward smaller dwellings due to cultural shifts (more singles, baby boomers downsizing). Augury remains hard, even for oracles. How the future plays out remains TBD.

Source: Budd Bugatch is a senior research analyst at Water Tower Research, an investor engagement strategies and open-access research platform. For information visit watertowerresearch.com.