From Home Furnishing Business
Editors Letter: Are There Storm Clouds?
This is our much anticipated financial performance issue. For the industry, it is steady as you go with net income at 3.2% of revenue, down slightly from last year. Most of the factors that would signal a downturn are not present. The stock market is at an all-time high. Consumer confidence, likewise, is at peak levels. There is some grumbling among the bond traders. As was pointed out in the last issue (May), the year before the five major downturns were peak in consumer confidence.
I know that the new tariffs are giving everyone the jitters. Even though the Washington politicians are saying that the Chinese are paying the tab, there are many suppliers wishing it would happen because the retailers are reluctant to take the 10-12% price increase. Unfortunately it is not going to happen and the consumers will have to pay more.
What it the concern? For the last two quarters furniture/bedding sales growth rate declined 4.1% and 1.8% respectively compared to last year. As of this writing, the results of Memorial Day have not been a block buster.
I am not saying that we are going into a major correction. The politicians will always keep the printing press running to get re-elected. Also, except for the Great Recession, the economy always increases the first year after the election.
This is just a cautionary letter. It is better to anticipate what you should do if we have a down turn. If sales decline, what would be the game plan based upon current performance at 3.2% net income? The average retailer could incur a 10% loss in sales before going into the red. Obviously, the top quartile could endure more of a downturn. The table below presents the numbers.
What could cause a loss of 10.2%? Consider:
- A new regional competitor moving into your markets. Who are the invaders- see the April issue, “Competitive Battlefield”
- A decline in close rate due to the retirement of several million dollar writers. Yes, they will retire and often in clusters – every close rate point on average represents 3% decline in sales
- A decline in average unit selling price results in less gross margin per unit sold/delivered. Beware- lower price points may not be a good strategy to combat tariff price increases
The question is, “What can a retailer do to prepare for disruption?”
- Control fixed cost, such as advertising, that increased this year .4% over last year. Measure the effectiveness of each advertising strategy
- Decrease sales office expense, which increased .3% over last year by investing in automated point of sale processes
- Adding/renovating stores- Do our stores need to be as large as 100,000 sq. ft.? The new consumer (Generation X) and the emerging consumer (Millennials) detest the larger format
We could continue and would like to discuss, but running out of pages. You know the drill and have been there before. The main thing is to have a plan.