Frankly, I am an infrequent contributor to SA (although 3 out of my 5 articles have been awarded PRO status) because I have very little to say that either has not already been said or that is not already priced into the market. That is not to say that I don't have a lot of good and even some great ideas regularly, but not that many that haven't gotten out there.
The holy grail of investing is the early discovery of any secular trend with long-term legs. And I stress the word 'early'-not necessarily the first, and certainly not the latecomers, but early on. The emergence of any trend as described inevitably results due to a confluence of economic factors that at a certain point suddenly all line up. A trend cannot be forced or fabricated. It must emerge and the only way to find a trend is when you keep stumbling into it again and again. This is what happened with my BIG prediction for 2015. I wasn't looking for this trend. I research hundreds of corporate developments each week but there's not always that much overlap. Here is what I came across in the order I discovered things:
My attention was first grabbed by a Bassett Furniture Industries (NASDAQ:BSET) Q3 report (ending Aug 31) on Oct.2:
"Our team was excited with our third quarter financial results as we grew our top line by 10.4% and quadrupled our operating income to $3.4 million," said Robert H. Spilman Jr. "We are executing our strategy at a higher level as witnessed by a 13% comparable store sales increase in our Company-owned stores and a strong incoming wholesale order rate during the period."
I was surprised by the increase in same store comps of 13%. Now you have to remember this is furniture, not Apple (NASDAQ:AAPL), Tesla (NASDAQ:TSLA) or Michael Kors (NYSE:KORS). 13% in this slow to change industry is huge. For reference, here are BSET's last 4 Qs of Comparable same-store sales (comps) going back from the present: 13%, flat, 0.6%, 3%.
Then about 10 days ago, Overstock (NASDAQ:OSTK) released its Thanksgiving/Cyber Monday holiday numbers with fairly impressive 23% y/y sales increase. But delving further into the story what emerged as the driving force behind that increase was not cellphones, tablets, or apparel but FURNITURE!:
"Furniture sales represented the highest-performing product category for Overstock, with a 37 percent increase over last year in sales from Nov. 27 to Dec. 1, including a 43 percent increase on Cyber Monday alone. These numbers helped Overstock's Home and Garden department, which includes furniture, become the highest performing department over the period, with a 37 percent sales increase from 2013 and a 36 percent increase over last year's Cyber Monday alone. The average industry growth for Home Goods on Cyber Monday, as reported by IBM, was 27.5 percent."
Now all those numbers came in way after BSET's already good showing through the summer, which leads me to believe that we are going to be seeing a blowout quarter for them and other competitors in the current quarter. More on that later.
In addition, most analysts agree that it was a disappointing Cyber weekend which underscores that what people went out there or online for was the big ticket home items. And if we were to have taken those numbers out of the picture it would have been a truly horrible selling season.
Then only yesterday, we had the troubled Q3 (ending Oct.31) results from Conn's (NASDAQ:CONN) where soured consumer loans sent the stock tanking 40%. But what most investors may very well have missed was the strong 19% sales growth led by, you guessed it, furniture. Have a 2nd look:
|Three Months Ended October 31,||Same store|
|2014||% of Total||2013||% of Total||Change||% Change||% change|
|(dollars in thousands)|
|Furniture and mattress||$||86,820||28.5||%||$||63,191||24.6||%||$||23,629||37.4||%||7.0||%|
|Total net sales||$||304,609||100.0||%||$||257,046||100.0||%||$||47,563||18.5||%||(1.0||)||%|
The following provides a summary of items influencing Conn's product category performance during the quarter, compared to the prior-year period:
- Furniture unit sales increased 31.7% and the average selling price increased 2.0%;
- Mattress unit volume increased 24.8% and the average selling price increased 12.6%;
- Home appliances unit volume increased 17.1% with a 6.4% increase in average selling price. Laundry sales increased 30.2%, refrigeration sales increased 26.0%, cooking sales increased 21.4% and air conditioning sales declined 27.3%;
- Television sales increased 3.4% in total and declined 10.5% on a same store basis. Gaming hardware sales increased more than 400%;
- Computer sales increased 16.1% and tablet sales declined 47.0%; and
- Other sales declined 14.7% due to the exit of the lawn equipment category.
Now don't get me wrong, I wouldn't touch Conn's with a ten-foot pole but the consumer loan issues do not affect the clear and present resurgence of Furniture as an emerging hot sector leader.
As I started seeing the overlap on the data, I started looking around and checking to see if I wasn't getting ahead of myself. Investors Business Daily in a piece on Restoration Hardware (NYSE: RH) reported a company update from Nomura analyst Jessica Mace:
"Exiting the second quarter, "trends were very strong," said Nomura analyst Jessica Schoen Mace in a research report Monday. She noted 35% growth in deferred revenue and customer deposit balances at quarter's end.
In addition, she said "reads" across the home furnishings industry in Q3 have generally been positive. Williams-Sonoma (NYSE:WSM), for example, reported comparable brand growth of 8.7%, Ethan Allen (NYSE:ETH) a 5% gain.
"And mattress retailers have had strong growth," she noted, "demonstrating momentum in high-end, big ticket home-related purchases."
And just in this morning, Hooker Furniture (NASDAQ:HOFT) reported Q3 results that came in marginally better than guidance. However, the real story was the outlook which by now should start to sound like a refrain:
"Based on the sales order momentum of last quarter and so far in the fiscal 2015 fourth quarter, we have an optimistic outlook for the remainder of the year," said Toms. "This November, which was the first month of our Fiscal 2015 fourth quarter, consolidated incoming orders were up about 10%.
"In the larger economic outlook, it's hard to find many negatives, as housing steadily improves, consumer confidence is up and the stock market is at an all-time high. Therefore, we expect and are planning for stronger business in the near term," Toms said."
Mr. Toms' outlook begs the question: though there is little doubt that the year is going to end with a rather large surprise bang for the sector, will it have the staying power to carry it even further throughout 2015?
We can look for the underlying cause to explain the demand. Sure we will find many rational reasons. I can rattle off a handful of sound reasons that taken together would provide a fairly sound argument to explain the removal of the resistance in making those big ticket purchases: Unemployment is at a 5 year low, more people have jobs-also at a 5 yr. high, disposable personal income is at a 5 yr. plus high. Lower pump prices. Continued home purchases. Consumer confidence up at 5 yr. high. No doubt there are other factors.
But that is missing the point. When we see demand rising disproportionately to other discretionary purchases it is precisely that diversion that is the telltale sign that something different is emerging. That's what a trend is: it sticks out in a way that defies logic or whatever else is going on. There is pent up demand and now that demand is being expressed.
In terms of an investment thesis, there is a relatively small group of players, some will do better than others, but all should provide some level of outsized returns. Amongst them are Ethan Allen, RH, Flexsteel Industries (NASDAQ:FLXS), Williams-Sonoma, Haverty Furniture (NYSE:HVT), LaZBoy (NYSE:LZB), BSET and HOFT. A lot of the strength in the housing market has come from higher prices homes so I would expect the higher end players like BSET and ETH will do better in this environment. But that is up for discussion.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.