W&WP June 2004

 

State of the Industry:

Furniture Sales & Imports on Growth Path

Industry analysts see a modest uptick in U.S. furniture sales, with even stronger market share gains in furniture imports.

By Susan Lorimor & Rich Christianson

 

U.S. demand for household furniture is on the rise, but not as fast as the growth of furniture imports.

According to Aktrin of Oakville, ON, retail sales of household furniture should hit nearly $70 billion this year and grow by an additional 2.4% in 2005.

BDO Seidman LLP, an accounting and consulting firm based in High Point, NC, reported that its most recent survey of residential furniture manufacturers found year to date new orders for January-March are up 15% over the first three months of 2003. "At this time last year, new orders were down 10% for the first quarter compared to the first quarter of 2002," BDO Seidman said.

First quarter shipments were up 13% over 2003, BDO Seidman said. "We continue to believe that 2004 will be a good year for the industry as a whole."

Meanwhile, as the industry held its collective breath awaiting the June 17 decision on the antidumping petition against Chinese wood bedroom furniture manufacturers, furniture imports continued to set new records.

Such was the backdrop Wood & Wood Products had to work with in researching and writing its annual "State of the Residential Furniture Industry" report.

Consumer Confidence Shakes Things Up

Analysts foresee a favorable year for the residential furniture industry, despite falling consumer confidence.

In May, consumer confidence was at its lowest point since March 2003, shortly after the start of the war in Iraq, according to the Associated Press. The AP reported the Consumer Comfort Index, which comes from an ABC News/Money Magazine poll, fell 2 points to -18 in the week ending May 30, down from -16 a week earlier. The poll has a margin of error of plus or minus 3 points.

The poll showed rising gas prices contributed to the declining consumer confidence index.

Stefan Wille, president of Aktrin Furniture Information in Canada, said from a sales point-of-view, not a manufacturing shipments perspective, things look fairly good for North American consumer spending on furniture. "There was a slow time in 2002 and 2003, but there is a good pickup of pent-up demand," Wille said.

Even so, Furniture Brands International lowered its expectations for the 2004 second quarter because of a "slow down" in consumer spending.

"Notwithstanding the strong order activity in the first quarter and highly successful results from the April Home Furnishings Market, we have recently seen substantially weaker demand levels at each of our operating companies," said W.G. (Mickey) Holliman, FBI chairman and CEO.

FBI, which owns Broyhill, Lane, Thomasville, Henredon and Drexel Heritage, had 2004 first quarter net sales of $658.5 million, compared to $613.8 million in the first quarter of 2003, an increase of 7.3%. Net earnings for the first quarter 2004 were $33.2 million; as opposed to $29 million for the same period last year.

 

Chart #1: Public Furniture Manufacturers Utilization of Imports ($ in Millions)
Manufacturer
Trailing 12-Month Sales
% Imported
$ Imports (Estimated)
Exposure to China
Bassett Furniture $312.0 13.0 $40.6 Yes
Bush Industries 340.2 0.0 0.0 No
Chromcraft Revington 202.8 15.0 30.4 Minimal
Ethan Allen Interiors 905.6 22.0 199.2 Yes
Flexsteel Industries 294.0 0.0 0.0 Yes
Furniture Brands Intl. 2,377.0 22.0 522.9 Yes
Hooker Furniture 261.9 40.0 104.8 Yes
La-Z-Boy Inc. 2,167.6 10.0 216.8 Yes
The Rowe Companies 331.4 0.0 0.0 Yes
Stanley Furniture 241.2 10.0 24.1 Minimal
Totals $7,433.7 15.3* $1,138.8  
*Estimated % of total imported product based on trailing 12-month sales; among the seven that import, the average is 19.4%.
Source: Mann, Armistead & Epperson Ltd., based on company reports and FBW estimates.

"While we had hoped the improved business conditions earlier in the year would be sustainable, it now appears that a definite slowdown in consumer furniture buying is occurring," Holliman continued.

Holliman linked concerns about the effects of rising energy costs, uncertainties in financial markets and international matters to weakened retail activity. He said he expects second quarter shipments to be slightly below 2003 levels.

Ken Smith, an analyst at BDO Seidman, said Holliman's nervousness is to be expected from the head of a public company. "When you start (looking at) a public company, everything is quarter to quarter, and so everyone gets jittery," Smith said.

Smith, on the other hand, is more confident. "All the other indicators are there (for a healthy business climate)," he said.

Favorable Economic Indicators

Smith and others noted the U.S. gross domestic product is growing and unemployment figures are falling.

"The overall economy and personal income are improving, employment figures are looking good and housing starts remain stronger than ever," Wille said. "A lot of people predicted that we would have a housing slowdown greater than what we have seen so far. Even if housing does not go up in unit terms, people are buying bigger, more expensive housing and that's good for the furniture industry."

According to the National Association of Home Builders, the remodeling market index, which gauges current market conditions and remodelers' calls for bids and jobs backlogs, hit a record high in the first quarter of 2004.

A healthy housing market index was even higher than the remodeling index, and held steady for two months. All these factors have a positive impact on furniture demand, and hopefully a slightly lower consumer confidence will not diminish their impact.

Wille said the only thing he could see that could potentially dampen consumer demand for furniture is rising interest rates. He said furniture is an interest-sensitive item because more and more of it is bought on credit terms.

Even if they climb, Smith said he believes already-depressed interest rates will remain low and residential furniture companies will have a good year. Many executives of public furniture manufacturing companies researched by Wood & Wood Products also anticipate a favorable year, despite the fact only a few of them posted big first quarter 2004 sales increases over 2003 first quarter.

Public Furniture Firms Post Mixed Results

WW&P research showed seven of nine public furniture manufacturers had sales increases when the most recent quarterly data for 2004 was compared to that of the same quarter of 2003. (See chart #1)

Bush Industries, another of the top 10 companies, is restructuring itself after declaring bankruptcy, and its most recent financial reports were not readily available.

Sales increases and decreases for the selected companies were as follows:

* Bassett Furniture, -1.3%. Shipments to Bassett Furniture Direct stores were up 11% over the previous year, but were below what the company anticipated.

Rob Spilman Jr., president and CEO of Bassett Furniture Industries Inc., said his company's wood division needs bolstering. Bassett had first quarter 2004 sales of $76.6 million.

"We are not satisfied with our current level of earnings," Spilman said. "Our focus continues to be on better execution at the store level and the profitability of our wood division. Our upholstery division continued its solid performance even as we consolidated two plants into one facility, and we were pleased that our company-owned stores in Texas posted positive earnings for the quarter."

* Chromcraft Revington, -6%. Sales were impacted by foreign import competition. Shipments of residential and commercial furniture, particularly bedroom, were down.

* Ethan Allen Interiors, +8.9%. "We remain optimistic that the business growth we have experienced is indicative of further economic expansion for the remainder of 2004," said Farooq Kathwari, chairman and CEO.

* Flexsteel Industries Inc., +46%. Residential new sales increased 39% from the 2003 third quarter.

* FBI, +7.3%. FBI continues to grow a U.S. presence of branded retail stores.

* Hooker Furniture, +5%. "We expect net sales to increase 8% to 12% in the 2004 second quarter, compared to last year's second quarter, as we expect to ship much of our imported product order backlog and better capitalize on the brisk incoming order rate," said Paul J. Toms Jr., chairman and CEO.

* La-Z-Boy, +0.7%. "During the past year, we continued to build and strengthen our proprietary distribution network, and of particular note are the mostly independently-owned New Generation La-Z-Boy Furniture Gallery stores, which have experienced increased traffic levels, higher average sales per consumer and greater total sales volumes than the prior format stores," said Kurt L. Darrow, president and CEO.

* The Rowe Companies, +11%. "Our Rowe furniture shipments increased 1% this quarter, despite two less production days in the operating calendar compared to last year," said Gerald M. Birnbach, chairman and president.

* Stanley Furniture, +15%. The company is expected to continue to grow its offshore sourcing program.

Rising Material Costs Affect Furniture Prices

As the business climate is expected to be good for furniture makers, they must contend with higher raw mate-rial costs for wood- and petroleum-based products. Dorel Industries has already faced rising costs.

Dorel's revenues in its home furnishings sector were up 18.4%to $131.4 million in the first quarter of 2004, from $110 million in the 2003 first quarter.

 

Chart #2: Market Share: All Household Furniture Imports/

U.S. Domestic Market by Product Category
 
Total Household
Wood Household
Upholstered Household
Metal Household
Bedding Household
1994 21.6% 26.4% 6.1% 26.8% 1.2%
1998 28.2% 33.5% 8.6% 41.2% 3.0%
2001 36.2% 43.0% 12.7% 50.6% 4.0%
2002 38.9% 47.7% 13.7% 53.7% 4.1%
2003 41.4% 51.8% 16.4% 56.5% 4.8%
Sources: Mann, Armistead & Epperson Ltd., using information from the American Furniture Manufacturers Assn., International Sleep Products Assn. and International Trade Administration.

"The biggest issue of the quarter was high particleboard prices and their impact on ready-to assemble furniture," said Jeffrey Schwartz of Dorel. "We foresee improvement going forward as we begin to implement higher selling prices."

Kurt Darrow, La-Z-Boy Inc. president and CEO, said his company's operating margins continue to be strained not only because of competitive pricing pressures and weaker than anticipated sales results in some of the company's divisions, but also because of material costs increases.

Higher prices are exactly what BDO Seidman's Smith is forecasting for the rest of the year.

U.S. Furniture Imports Hit New High

Wood residential furniture imports continued their surge during the first quarter of the year, besting the 2003 January-March period by 14.6% and climbing to a record $3.6 billion.

China furthered its lead on the import pack in shipping $1.48 billion worth of household furniture to the United States, an increase of 23.6%. China's slice of the expanding import pie is now more than double that of Canada, its nearest rival.

The possibility that a favorable ruling in the antidumping petition would result in the imposition of tariffs on Chinese wood bedroom furniture did not deter its continued flow of products into the U.S. market. Between January and March, wood bedroom furniture from China reached $375 million, an increase of 29.3% over the first quarter of 2003.

U.S. imports of Canadian furniture increased a modest 4.2%. This is a far cry from the double-digit growth Canadian furniture manufacturers enjoyed throughout most of the 1990s, following the enactment of the North American Free Trade Agreement. In contrast, Mexico, the other major NAFTA partner, saw furniture exports to the U.S. climb by 15.8% following a year of virtual stagnation.

Vietnam's furniture industry, profiled in the December 2003 and January 2004 issues of Wood & Wood Products, registered the biggest percentage gain among the top source countries of U.S. furniture imports. Following the model implemented by China, Vietnam is aggressively seeking foreign investors to build new plants and capitalize on labor rates that are reportedly half or less of what furniture workers make in China.

Among the companies to be lured to Vietnam is L.G. & J. Stickley. The company, which employs several hundred Vietnamese immigrants at its plant near Syracuse, NY, is building a 185,000-square-foot plant in Vietnam's Binnh Duong province to make new lines of furniture at entry-level prices.

The rapid rise of China, and now Vietnam, has come at the expense of Taiwan. Taiwan, which was the No. 1 source of U.S. furniture imports up until 1993, fell from ninth to 11th on the list of foreign furniture sources.

Furniture Outsourcing Plays Big Role

The estimated market share of U.S. household furniture imports jumped from 21.6% in 1994 to 41.4% last year, according to Mann, Armistead & Epperson. (See chart #2) The increase was even greater in the wood household arena where imports' share has risen from 26.4% in 1994 to 51.8% last year.

U.S. imports of upholstered products, which are more difficult to cost-effectively produce overseas because of their bulk and extensive fabric options available to consumers, have more than doubled in market share over the last 10 years.

A major portion of these market share gains by foreign sources has been fueled by domestic furniture manufacturers that have either moved some of their production offshore or are outsourcing new furniture lines from foreign manufacturers instead of producing them in their U.S. plants.

 

Chart #3: Top 10 Sources of U.S. Furniture Imports

*Figures in millions of dollars
  Jan-Mar '04 Jan-Mar '03 % Change
China
1,477
1,195
23.6
Canada
632
605
4.2
Italy
288
293
1.7
Mexico
176
152
15.8
Malaysia
167
137
21.9
Indonesia
158
156
1.3
Thailand
113
91
24.2
Brazil
84
61
37.7
Vietnam
63
37
70.3
Philippines
53
58
-8.6
Top 10 Total
3,211
2,785
15.3
World Total
3,601
3,143
14.6
Source: U.S. Department of Commerce

According to a review of 10 public furniture companies by Mann, Armistead & Epperson, Hooker Furniture imports an estimated 40% of its furniture; Ethan Allen and Furniture Brands each import 22% of their products.

In sharp contrast, Bush Ind., a manufacturer of ready-to-assemble furniture that recently filed Chapter 11 with the intent to reorganize, Flexsteel Ind. and Rowe Furniture Companies do not import any of their products. (See chart #1)

Ethan Allen, which a couple of years ago formed a strategic partnership with the Chinese furniture giant Markor, recently opened its fourth furniture store in Beijing. In an April 20 press release announcing Ethan Allen's third-quarter results, Kathwari said, "Strategic initiatives undertaken during the past year to help position the company for (the) next phase of economic growth are already providing benefits ... Stronger marketing programs, more efficient U.S. manufacturing operations and better sourcing capacity, both domestic and abroad, have enabled us to increase sales, improve profitability and continue generating healthy levels of operating cash which has been, and will continue to be utilized to grow our business and increase shareholder value."

Stanley Furniture has also adopted a strategy of "blending efficient domestic manufacturing ... with intelligent outsourcing of certain component parts and finished goods, (allowing) us to offer a compelling value proposition," according to Jeffrey Scheffer, president and CEO.

                                                                                                                                                                                           

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