Cover Story: Retail Metrics For Furniture Retailing

June 9, 2019  by HFBusiness Staff in Business Strategy, Industry   

The retail climate for furniture has remained relatively steady over the last five years at 5.6 percent average growth according to Impact Consulting Services (parent to Home Furnishings Business) FurnitureCore.com industry model. Furniture stores overall took baby steps last year as these retailers slightly outperformed the industry total with 6.8 percent growth versus 6.6 percent for all channels. This growth was despite a slowing in the fourth quarter that continued through the first quarter of this year. Combined furniture and bedding industry sales grew only 1.8 percent in the first quarter versus the same quarter in 2018. Preliminary reports show furniture store first quarter sales appear to be down 2.5 percent. (Table A). 

This is the sixth Home Furnishings Business report on Retail Metrics for Furniture Retailing providing a comprehensive look at financial performance in the home furnishings industry via comprehensive data collected throughout the year by Impact Consulting Services. This data is collected through Impact’s FurnitureCore application, Best Practices, which provides an ongoing monthly measure of a retailer’s performance. This subscription-based online application allows retailers to compare themselves to other home furnishings retailers and devise a plan to better manage store operations. No individual retailer’s numbers are shared, only composite percentage results. (See Methodology for additional criteria used in the Retail Metrics report.)

The focus of this article’s financial comparisons is two-fold. Results are provided for All Participants and reflect the performance of the entire sample compared to last year. In addition, the Top Quartile results are presented in three retailer size segments for performance comparisons based on revenues – Under $5 million, $5 million to $25 million, and Over $25 million. The Top Quartile includes the top 25 percent in performance. It should be noted that retailers participating in FurnitureCore’s Best Practices application are retailers focused on improving their company’s performance and does not reflect the industry in total.

 

The sales ranges not only reflect size of retailer, but in turn the differing operational characteristics the company size brings to profitability. The Under $5 million retailers are the surviving Mom and Pops who have developed niches and strategies for staying in business. Retailers with sales $5 million to $25 million have often emerged from Mom and Pop stores and are usually very owner-focused in operations. The larger “Over $25 million” retailers may also reflect similar ownership, but have also developed more tiered management operations adding professional managers, for example in warehousing/delivery functions. Depending on size, this top sales range may also have accounting practices that are driven by tax strategies. 

The overall financial performance of All Participants is shown in Figure 1. Each portion is further compared to the Top Quartile in each size segment with more in depth analysis.

Overview of Key Performance Indicators

Higher operating costs tell the story of the decline in Net Operating Income from 6.4 percent in 2017 to 5.7 percent last year. Table 2 gives an overview of key indicators – Gross Profit, Sales Expense, General & Administrative Expense, Net Operating Income, and Credit Expense. Gross Profit of 48.7 percent was down from 48.9 percent in 2017 impacted by slight increases in Cost of Goods sold -- from 51.1 percent of revenues in 2017 to 51.3 percent last year.

The importance of controlling all facets of the business is reflected in the performance level of the Top Quartile retailers compared to All Participants, also shown in Figure 2. Small Mom and Pop retailers under $5 million in sales and their larger counterparts, $5 million to $25 million retailers, did a much better job at controlling Cost of Goods sold than much larger dealers over $25 million. Top performing retailers in all size ranges outperformed the total group at reducing Sales Expense, G&A costs. All Participants were surprisingly able to bring down Credit Expense. Sales Expense is comprised mostly of sales force compensation, advertising, and warehouse/delivery expense. The biggest chunks of G&A are Occupancy costs (rent/lease) and Administrative costs, primarily administrative and managerial salaries. 

Each segment of financial performance is presented in more detail in the below. (Note: Historical 2017 data has been slightly revised from previous reports.)

Above the Line Income

Total Revenue encompasses merchandise sales as well as returns, sales of fabric/leather protection, and delivery income (Table B). Improvements in each component are detailed below.

Returns: Merchandise Returns (Table B) represent less than 1 percent of total revenue for the group, a significant improvement from 1.4 percent in 2017. However, smaller retailers tend to handle many of their returns outside of the tracking system with voided tickets and even exchanges which is reflected in the Top Quartile lower numbers for these retailers. Meanwhile larger firms are more likely to document these transactions negatively reflecting on their performance.

Merchandise Protection: Merchandise Protection (Table B) is often an important profitability component for traditional retailers, with the exception of upper to premium dealers, who often consider it a negative. This income usually represents around 3 percent of total revenue with its importance growing slightly higher among top performing retailers.

Delivery Income: Free delivery (Table B) has become the expectation of consumers in all retail outlets with revenues falling consistently every year. High performing smaller retailers in both sales range categories under $25 million are more likely to provide free delivery to their customers. Retailers are also experiencing a growth in customers who want to pick up their own purchases from the store.

Cost of Goods Sold

As tariff wars keep cropping up, the threat to a retailer’s Cost of Goods Sold becomes a never-ending crisis. An improvement in Cost of Goods Sold for the retailer is accomplished by either “buying better” or simply not having to discount its merchandise so heavily. The total group last year saw slight growth in COGS at 51.3 percent of revenue in 2018 compared to 51.1 percent the previous year. The two smallest Top Quartile groups, $25 million or less were able to best that percent usually performing in the 49 to 50 percent of revenue range. (Table C)

Gross Profit

With lack of improvement in Cost of Goods Sold, Gross Profit declined slightly as well for the total group. For All Participants, Gross Profit fell from 48.9 percent of revenue in 2017 to 48.7 percent in 2018. Again, Top Quartile performers in the two groups under $25 million sales reached Gross Profits between 50 percent and 51 percent in 2018. For the group over $25 million, the higher cost of Goods Sold is reflected in their lower 46.5 percent Gross Profit. (Table D)

The gross margins of the Furniture industry at 48 plus percent are the envy of virtually all other retail industries. And some vertical furniture retailers enjoy even higher margins due to their direct sourcing models. By comparison, according to the Census Bureau, in 2017 gross margins for electronics and appliance stores averaged 32.7 percent; warehouse clubs and superstores, 23.1 percent; department stores, 32.6 percent and pure electronic shopping retailers 41.2 percent. One of the paradox’s of the furniture industry is its high gross margins and small profits. With such healthy margins, why does the furniture industry make so little profit? Tracking how much of it the industry spends on selling the product and running the business brings these low profits into focus.

Selling Expense

After the cost of the goods, Selling Expense is the highest cost segment of the business (Table E). For several years this figure has remained relatively constant. Between 2014 and 2017 Selling Expense grew only 0.2 points from 23.8 percent of revenue to 24.0 percent. This past year the total group reported a 0.4 point jump in Selling Expenses, from 24.0 percent to 24.4 percent. This is the cost of attracting the consumer to the store (Advertising), converting that consumer to a purchaser by trained personnel (Sales) and successfully delivering that product to the consumer’s home (Warehouse/Delivery). All Selling Expense categories grew more costly in 2018 with the exception of Warehouse/Delivery/Service expense. Each category is discussed in more detail below.

Advertising Expense. Retailers are spending more to attract customers. The cost of promoting product experienced a big jump as retailers now have a smorgasbord of advertising choices, including the internet. Advertising costs increased from 5.6 percent of revenues in 2017 to 6.0 percent in 2018. (Table E). Advertising channels still differ by size of retailer where larger retailers will use more broadcast/air channels while smaller retailers may rely heavily on print mediums. And advertising on the internet is adding options for all retailers. Very small Mom and Pop retailers are increasingly required to spend more on advertising to attract customers. It is imperative that advertising’s effectiveness be measured on a weekly basis and the only measure is number of visits – or Ups – to the store or the website. (Table E)

Sales Expense: The largest component of selling expenses is the cost of the sales associates, along with the cost of managing and motivating of them. Included in Sales Expense (Table E) is the sales associates’ commission, as well as sales management, bonuses/contests and similar activities. Sales expense is increasing throughout all industries as retailers struggle to find motivated sales associates. Overall, Sales Expense was up 0.2 points from 9.4 percent of sales in 2017 to 9.6 percent last year. Small retailers under $5 million have the highest sales expense of the top performers at 10.3 percent of revenues.

Warehouse/Delivery/Service: The “after the sale” cost of Warehouse/Delivery/Service is also a significant expense to the retailer. Last year retailers made significant progress in controlling these expenses. As previously mentioned, many customers are choosing to pick up purchases from the store. Also, the low cost of gasoline throughout the year may be a contributing factor. Warehouse/Delivery/Service expenses fell from 7.3 percent of revenue in 2017 to 6.9 percent last year (Table E). For Top Quartile performers, the larger the company in our retailer group, the bigger the cost for all Warehouse, Delivery, and Service expense. Top performing retailers over $25 million in sales spent 9.4 percent of revenues in the category. Often a retailer’s upfront performance is negated by the backend if the retailer is unable to manage it correctly. Many mid-sized retailers are now outsourcing this function in an effort to bring this cost down.

Store Sales Expense: A small but important selling cost, Store Sales Expense, averages 1.9 percent of sales for the total group (Table E). Retail technologies exist to eliminate the sales counter which can cost one percent or more, but can negatively impact the consumer’s excitement for the furniture purchase. 

General and Administrative Expense

The final piece to profitability is the control of General and Administrative Expenses which, for the most part, are fixed expenses and must be controlled relative to the potential volume. Primary components include Occupancy costs – the place to conduct business and the costs to keep it open, the cost of the management team that develops and executes a strategy, and finally the technology and information systems that are essential in controlling the process. These expenses can be as much as the Selling Expense in some cases and generally vary significantly by the size of the retailer. In 2018, G&A totaled 18.6 percent of revenue, the same as the previous year, an important feat considering this is the one part of operations that does not touch the selling process (Table F).

Information Systems: Technology costs are still well under 1 percent for the total group as well as the best performing retailers and are holding steady (Table F). Even smaller retailers are embracing the implementation and ongoing maintenance of systems necessary to run a business smoothly understanding these systems are critical to profitability. The larger retailers investing more in information systems have achieved an advantage in processing the customer order after the sale, often by transferring the process to sales associates. 

Occupancy: Costs for keeping the doors open ran a significant 8.2 percent of revenue for the total group last year, up from last year’s 8 percent. The best performing companies in the under $5 million and $5 million to $25 million ranges enjoy Occupancy costs around 6 to 7 percent (Table F). Large retailers over $25 million spend less often having the upper hand with the ability to secure the best locations. But in many prime areas real estate rents are escalating. Nevertheless, consumers are increasingly placing a priority on location wanting to shop closer to home or visit retailers along their normal shopping routes. Many retailers are looking at ways to lower the size of their store footprints as a way to respond to the pressures from e-commerce retailers. 

Administrative Expense: The largest chunk of Administrative Expense is management salaries along with bonuses, professional fees, and insurance. Overall Administrative fees for All Participants are down from 9.4 percent of revenue on average in 2017 to 9.1 percent in 2017, with total costs for management salaries as a percent of revenue holding steady. Top performing retailers regardless of size are keeping Administrative Expense in the 8 percent to 8.5 percent of revenue range (Table F). Spending money on managerial positions is often a difficult decision but can often produce big results with the proper personnel. 

Credit Income and Expense

Retailers acting as credit houses continue to disappear and what was once a key area of profitability is now a crucial place to control costs. Net Credit Expense fell significantly in 2018 to 2.8 percent of revenue compared to 3.3 percent in 2017 for the All Participants. Top Quartile retailers had mixed performance with retailers over $25 million reporting Net Credit Expense higher at 3.5 percent (Table G). From our perspective, credit is a selling expense that originally emerged as a perceived necessity to generate consumer traffic. But in our experience, fewer and fewer consumers opt for offered credit promotions. Many consumers are instead opting for promotions from personal credit card companies as opposed to store credit promotions. 

Net Income (% of Revenue)

Net Income finished at 3.5 percent of revenue last year, down from 3.6 percent in 2017 for the total group. For the Top Quartile in each size range, improvements in General and Administrative Expense, especially Occupancy costs, led the way to more than doubling the Net Income performance of All Participants. For the best performers, depending on the size of the company, Net Income ranged from 6.8 percent to 9.3 percent among the top 25 percent (Table H).

Summary

Collectively for the traditional retailers in our total group in 2018, keeping costs down proved to be difficult last year. Gaining as a percent of revenues were advertising costs, salaries in all areas, and rents, just to name a few. The strides made in Delivery/Warehouse/Service, despite the decline in Delivery Income, along with gains made at reducing Credit Expense were not enough to pull up final Net Income. For the two Top Quartile groups under $25 million, the progress made in Cost of Goods Sold, Occupancy, and Administrative costs, propelled them to more than double the performance of the total group. The largest Top Quartile, retailers over $25 million, also did better at controlling Occupancy and Administrative costs than the total group, but had much higher Cost of Goods Sold. Indications are that salaries and rents will continue to become more costly in the future forcing the retailer to look more closely at all areas of performance. HFB’s June issue article entitled Statistically Speaking addresses the increasing costs of wages.

Keep in mind our numbers are only guidelines to stimulate thought and discussion of how to profitably run a retail operation. We caution any specific retail figures, to be comparable, must be compiled to conform to these classifications.

We believe an ongoing focus on a company’s statistics is the path to high performance. It is not achieved in a month, but is part of a continuing process. Such a process is greatly enhanced with membership in a retail performance group that allows for open and frank discussion with peers of the barriers to achieve certain objectives. 

The overall industry statistics reflect growth last year and many retailers are achieving exceptional results. We challenge you to be one of those. Home Furnishings Business is committed to providing input to your process.