By Brian Sozzi
Ask any executive in the furniture industry how they characterize the operating conditions from 2005-2007 and the answer would be highly interesting. After all, housing prices went through the roof in those two years and demand to own a piece of the American Dream was feverish. The period truly defines the very essence of an economic boom, fed by the extension of cheap credit , great paydays in various industries, and of course the emboldening feel of being wealthy on paper.
However, the furniture industry basically stayed stuck in neutral gear throughout the good times. I have labeled the period as having empty home syndrome. The explanation for this syndrome, in my view, could be whittled down to the following:
- McMansions went unfurnished. If a person stretched to buy this type of home, it was likely that not enough funds were available to outfit every single room from top to bottom.
- A litany of forces were present to siphon dollars away from furniture, such as new television and computing technologies, and an endless stream of new product introductions from Apple (AAPL). Whereas $1,000 in 1992 would have been allocated to a new couch and end table, the consumer in 2006 opted for a plasma television hanging on the wall.
- Those with the luxury of having equity in their homes decided to spend money on kitchen upgrades and various other remodeling projects, which were seen as surefire ways to boost a home's value in an overheated marketplace. Furniture goes in and out of style quickly and generally travels with the homeowner should they move.
The data available supports the claims of furniture sales being absent from the two year plus party in consumer spending. From January 2005, to the peak in furniture sales in January 2007, the increase was a mere 8.23%. After peaking in January 2007 for the cycle, furniture sales began their precipitous decline into oblivion (in hindsight the decline was a leading economic indicator...the S&P 500 (SPY) topped out in October 2007). Actually, it's safe to say that furniture sales were relatively limp for three years amidst one of the largest credit induced economic booms in history. That says much about the aforementioned competing external forces swirling around the consumer.
Things started to get ugly in furniture land from January 2007, onward. From that month, furniture sales declined year on year for 24 consecutive months. As no small surprise the sector's going up in smoke status squeezed mom and pop furniture retailers out of the business, caused publicly traded entities to find expense religion, and demonstrates why an Ethan Allen (ETH) was able to launch a free interior design service to customers (the company hired out of work interior designers and promised commissions in addition to base).
The tide has turned, however, with February 2010 marking the point where the recovery began in the furniture sector. Beginning in February 2010, sales have gone onto increase year on year in 12 of 13 months, with the sole down month (February 2011) being weather related as opposed to a trend reversal. If government data is not to be believed, tally up the number of furniture manufacturers and home furnishings retailers that have brought home the bacon to shareholders in terms of sales, earnings, and forward-looking commentary as of late.
Ethan Allen (ETH): Got the ball rolling on January 25, printing a 10.7% increase in comparable design center sales in the quarter. CEO acknowledged that bigger ticket transactions were happening. Stock price since the earnings report: +5.6% (stock popped in response to earnings).
La-Z-Boy (LZB): On February 15, reported a 4.7% increase in comparable store sales, sharply reversing the prior quarter decline of 7.1%. Traffic and conversion were positive, and the CEO sounded like a recharged man compared with the downbeat previous earnings call. Stock price since the earnings report: +23.0% (stock popped in response to earnings).
Furniture Brands (FBN): Forever the industry's whipping boy, it reported a staggering 19.0% comparable store sales increase in the fourth quarter on February 3. Stock price since the earnings report: +21.5%.
Bed, Bath & Beyond (BBBY): Surpassed consensus earnings, cleanly, by $0.15 on April 6. Need I say more? Stock price since the earnings report: +5.6% (stock popped in response to earnings).
Tempur Pedic (TPX): The business trends were so strong that management deemed it necessary to preannounce better-than-expected earnings on April 7. Stock price since the earnings report on April 21: Flat (stock popped in response to the markup in guidance, and has been a significant outperformer since the summer of 2010).
Select Comfort (SCSS): Surprised the market by 58% with respect to its March quarter-ended earnings. Company comparable store sales rose 26%. The stock closed about $4.00 higher from the prior session close on earnings day.
So what is fueling this new school mini furniture boom? In the face of 8.8% unemployment (the direction has sure helped) and a long list of macro issues that should be inhibiting the sector's recovery, the move to more fertile plains is indeed counterintuitive. In the most basic form, below is my laundry list explaining the sector's revival.
- Stimulus fueled yes, but new and existing homes sold in the summer of 2010. Existing home values also perked up. Yet, from April 2010, to September 2010, furniture sales barely grew. I think that fact underscores the lack of confidence by consumers, the real strong degree of confidence that lends way to sales of furniture. The confidence on the part of new and existing homeowners is what I reference; for new homeowners, confidence was needed that the newly purchases home would not be worth 10% less by the end of the year and for existing homeowners, their most illiquid financial asset was finally not totally underwater. Sprinkle in the profound impact on all types of consumption via the wealth effect, and the sales recovery becomes clearer. Theme: lag effect.
- Two differing classifications of renters: Renter A owned a home during the boom but walked away from ownership for whatever reason. Home furnishings went into the trash or into storage as the homeowner moved into a rental. Now back in a home, the homeowner wants to start fresh, and even must replenish goods tossed aside in the hurry to rent. Renter B did not own a home from 2005 to 2007, but now finds affordability enticing. Going from a two bedroom apartment to a three bedroom ranch with two bathrooms requires a greater number of living essentials.
- Furniture shoppers of all kinds are arriving back to the market and finding attractive pricing as manufacturers have engineered into affordable price points and retailers have explored everyday best pricing, or flat out aggressive discounts.
Does the furniture recovery continue? A shift into third gear from the fourth gear that has been driven since late last year is probable, seeing as home values have retrenched once again and equities gains have moderated. If one wants to pay to play, assume a stock picker's mindset and favor where the valuation offers cushion, such as on La-Z-Boy.