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From Home Furnishing Business

Furniture Shipments up 4% in 2013

Furniture shipments increased 3.97 percent in 2013 compared with 2012, when they increased 6.34 percent over 2011, according to High Point accounting and consulting firm Smith Leonard.

The 3.97 percent increase compared with a 4.8 percent 2013 increase reported in Furniture Insights, which has some different participants.

Upholstery vendors reported an increase in shipments of 5.45 percent after an increase of 7.09 percent in 2012. Casegoods participants’ shipments increased 0.64 percent in 2013 after a 4.64 percent increase in 2012.

According to our monthly survey, shipments in 2013 were up in every month compared with the same month of the prior year except for February and March, when they were down 2 and 3 percent, respectively, from the same period a year ago. Also in 2012, shipments were up every month but September and December, when they were down 1 percent from the previous year. December 2009 was the first month since June 2006 that the survey showed an increase in orders.

The trend has continued to show improvement in 2014 with new orders up 3 percent for the first quarter, according to the monthly Furniture Insights survey. Shipments were up 4 percent for the first three months compared with 2013. Results have been uneven through most of June, as business from month to month and company to company is not consistent. Despite those fluctuations, the industry is into the fifth year of at least continued overall improvements.

"The overall economy, while certainly not where we need it to be, seems to have consistently improved since the end of the recession," said Smith Leonard Managing Partner Ken Smith in the report. "The good news is consumer confidence continues to slowly creep up which we continue to believe is the real key for furniture business.

"Housing has slowed down a bit from the growth we saw last year but some of this has been weather related, at least in parts of the country. Housing stats have increased which should take some pressure off lower inventories of existing homes. Prices have continued to rise, but are more stable than last year."

Two good things are going on with housing that affect the whole economy in key areas.

"One, with prices going up, fewer mortgages are under water," Smith said. "Also with more construction, more jobs are created, putting lots of people back into more full-time jobs. Of course, all of this leads to more sales, which means commissions for real estate agents and so on down the line. This means more money in the economy."

He added that inflation seems to continue to be under control and interest rates are still at very manageable levels; the stock market is helping most people’s confidence levels; and vehicle sales have been doing very well, which indicates more consumer confidence.

"On the negative side, internationally, things are not so great in much of the rest of the
world. We continue to have major worries over the impact of Obama care, if we can ever figure out what it all means," Smith said. "Hopefully as more is learned about the impact of the act, it can be tweaked, as there is no doubt that something needs to be done about the cost of health care. Also, mortgages are not as easy to get as they once were and the time it takes seems to be way too long to be able to get one.

"We have said this before, but think it’s worth repeating. A good thing in the long run for
furniture sales is that larger down payments, and tighter lending, will keep monthly payments at much more reasonable levels compared to monthly incomes. This should leave a bit more disposable income which can be used for furniture. It will take some time for this to work its way into the system, so we may not see much impact in the near term, but over time, should be helpful."

Smith Leonard noted a slight increase in operating profits this year after a nice increase last year. The results comparing year to year were very mixed, but overall more in the black, and some vendors turned some nice profits.

"Many of the participants have returned to profitability from some poor performances during the 2008 and 2009 years, and we saw more of that this year," Smith said. "This year’s operating statistics were, on an overall basis, very similar to last year’s."

Gross profit margins improved slightly to 19.6 percent in 2013 from 19.57 percent in
2012. Operating profits (gross profit less selling and administrative expenses) improved to 4.16 percent from 4.1 percent in 2012.

"We would like to see these margins in the 5 plus percent range in order to provide funds for interest, taxes, any principal payments, and needed capital expenditures, as well as provide a decent return to owners," Smith said. "As with our surveys in the past, we had some changes in participants. In order to provide more meaningful comparisons from year-to-year, we break out some of the results for those who participated in both years--referred to as 'both-year participants.'"

For both-year participants, gross margins fell slightly to 19.33 percent from 19.5 percent
in 2012. Operating margins were about the same at 4.18 versus 4.22 percent last year.

In the casegoods category, gross profits increased to 22.03 percent in 2013 from 21.35 percent in 2012. Both-year participants’ gross profits decreased to 21.27 percent from 21.49 percent. Operating income improved to 2.53 percent in 2013 from 2.49 percent in 2012. Both-year casegoods participants’ operating profits were 2.56 percent in 2013 down from 2.78 percent in 2012. The decline was impacted by the decrease in gross margins offset by a decrease in selling expenses of 0.1 percent. Administrative costs were basically flat.

"The decline in operating results for both-year participants was a bit uneven among the
participants but approximately 70 percent of the participants had reductions in operating income," Smith said. "There were similar results seen in gross margins as approximately 80 percent reported declines in margin. Approximately one-half of the both-year participants had increased selling costs as a percent to sales, while about the same number of percent of the participants reported increased administrative costs, though the variations were generally small."

Results in the upholstery category improved somewhat, though gross profit margins fell to 18.53 percent from 18.8 percent in 2012, but operating profit margins improved to 4.91
percent from 4.83 percent in 2012.

Similar results were reported among the both-year participants. Gross margins declined for
both-year participants to 18.48 percent from 18.66 percent. Operating margins stayed the same at 4.91 percent. Operating margins were affected primarily by the 0.18 percent decline in gross margins, offset by a decrease of 0.14 percent in administrative expenses and a small decrease in selling expenses as a percent to sales. The gross profit percentages are skewed somewhat by several participants who reported very low margins.

"We note that approximately 65 percent of the both-year participants reported gross margins of 20 percent or more versus 62 percent in 2012," Smith said. "Some 38 percent of the participants reported operating profits of 4 percent or more compared to 35 percent in 2012.
Approximately 65 percent of both-year participants’ gross profit margins declined this year.
Approximately one-half of the participants reported improvements in operating profits (or
reduction of losses) versus 58 percent showing improvement in 2012."

In casegoods, the slight decline in gross margins of 0.22 percent for both-year participants was attributable to a 0.08 percent decrease in material costs as a percent to sales offset by a 0.14 percent increase in direct labor and a 0.16 percent increase in overhead. The decrease in material costs was likely the result of more imported products (all treated as material costs). For pure importers, gross margins were at 24.12 percent, down slightly from 24.25 percent.

"The comparisons in the casegoods participants continue to be difficult with the shifts to
imports," Smith said. "We think comparisons at the gross margins and selling and administrative costs, along with operating margins, remain important."

In upholstery, the decline in gross margins for the both-year participants of 0.18 percent
followed an improvement of 0.51 percent in 2012. Most of the decline this year related to a 0.14 percent decline in material costs and a decline in overhead of 0.26 percent offset by a 0.58 percent increase in direct labor.

On the retailer side: "We believe that the good retailers have done the same as manufacturers and distributors--that is they have tried to right size themselves to current economic conditions--not betting that business will suddenly get better," Smith said. "It does appear that many of the smaller retailers have managed to hang on through all of
this. While we had a number of bankruptcies and “going out of business” deals, it appears that 2013 did not have a significant number of bad debts and no major ones like we have seen in the past."

He added that another issue for some smaller retailers is that, in many cases, their real estate is not worth what it was a few years ago, which affects their borrowing power.

"On the other hand, we continue to see expansion by some of the larger ones, as well as
more specialty stores popping up. Plus internet sales and big box sales continue to rise," Smith noted.

Looking ahead at the rest of 2014, Smith anticipates price increases, both for domestic and imported materials, as well as imported finished goods. With changes in Asia and freight rates, as well as raw materials in the United States, more changes are likely.

"We really see no reason why the second half should not be reasonably good," Smith said. "While the first quarter GDP was negative, most of that was blamed on weather. Vehicle sales are up, unemployment is down and adding jobs, and all the other indicators we talk about are stable or improving. If we can keep the stock market stable, we expect the rest of 2014 to continue to improve for the industry."

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