US Market Outlook  

S&P Investment Review of US Homefurnishing Retail

Michael Souers of Standard & Poor’s, A Division of The McGraw- Hill Companies, Inc reports on the US Home Furnishing Retail

While inventory levels have been cut, negating the likelihood of significant discounting, we expect modest promotional activity as companies look to attract value-conscious shoppers

Our fundamental outlook for the homefurnishing retail sub-industry is neutral. We think macroeconomic trends such as a relatively weak housing market, soft underlying employment trends, tight consumer credit and an increasing national savings rate will lead to only modest improvement in 2013 and 2014. Furthermore, we expect that, in general, consumers will be hesitant to buy big-ticket furniture items. We also think raw material cost increases may put some pressure on retailers’ margins. We view the homefurnishing retail industry as intensely competitive, with retailers looking for ways to broaden product offerings as they add square footage to their stores. General merchandise stores such as Target and Wal-Mart are contributing to this, in our view, and have been offering a greater amount of homefurnishing items at discount prices. While inventory levels have been cut, negating the likelihood of significant discounting, we expect modest promotional activity as companies look to attract value-conscious shoppers.

We think the homefurnishing retail sub-industry is largely fueled by the housing market, which is sensitive to changes in interest rates. Following a boom in the housing market in the early to mid-2000s, housing starts fell precipitously to a trough level of 554,000 in 2009. While starts improved slightly in 2010 and 2011, 2012 brought about a much stronger recovery. In fact, starts rose 28.0% in 2012, to 783,200 units. While still low from a historical perspective, this surge has increased confidence in the view that the housing recovery will continue over the near to medium term. In fact, Standard & Poor’s Economics is projecting an 18.7% increase in starts in 2013, to 929,200, followed by a 24.0% increase in 2014. Starts at this pace should fuel increasing sales of home furnishings, in our view. Sales of furnishings typically lag the housing market by several quarters, so we think the pace of sales should accelerate over the next 12 months.

Year to date through November 29, the S&P Homefurnishing Retail Index rose 32.1%, slightly outpacing the 27.1% advance in the S&P 1500. In 2012, the sub-industry index increased just 2.2%, underperforming the 13.7% advance in the S&P 1500.

Executive Summary
New orders in September were 4 percent higher than September 2012 which was somewhat in line with expectations. Most of what we had heard at Market was that business was reasonably good up until the government shutdown. Year-to-date, orders were up nicely at 6 percent.

The year-to-date results also showed that some 80 percent of the participants were showing increased orders for the year. This was the highest percentage since prior to the recession – good news for the industry.

Shipments were up very nicely at 11 percent versus September 2012 and remained up 4 percent yearto- date. But increased shipments are a good thing since they lead to cash.

Receivable levels remain in very good shape considering increased shipments over both September 2012 as well as August 2013. Inventories are up 5 percent over last year, the highest percentage we have noted lately but still seem reasonable based on business levels.

Factory and warehouse employees were up 3 percent over last year, up from a 2 percent increase reported last month. Factory and warehouse payrolls did seem a bit high showing a 13 percent increase over September 2012, the same increase as reported last month.

Overall, September results were pretty much in line with expectations and in line with most of the talk we heard at Market. It will be interesting to see what the October results bring. As we reported last month and heard at Market, business at retail slowed due to the government shutdown. Then it seemed to improve a bit right before Market. Since Market was late this October, many market orders will likely not be reflected in our next survey so we may need to look at October and November together to get a good handle on the impact of Market.

As for the economy, there were some decent reports. Existing home sales are slowing a bit due mainly to lack of inventory and some loan issues, but still growing over last year in spite of higher prices.

Retail sales were up at a decent pace and sales at furniture and home furnishing stores were up at a good pace for October. The stock market has been very kind with the Dow over 16,000 and the S&P over 1,800, records for both indexes. Interest rates remain very low with no apparent need for them to increase any time soon, at least to any significant degree. Gas prices have come down even right before the Thanksgiving Holiday Season.

So why is there not joy in Mudville? Well, mainly because consumer confidence remains too low. Confidence fell again in October and according the Conference Board, this consumer sentiment could cause concern for the Holiday Season.

It really is a shame that confidence is low. When we think back to good times of the past, we always equated low interest rates, a good stock market, growing employment, good housing markets, and low inflation to good business for the furniture industry. What we seem to be proving for sure is that while all of that is helpful, what we really need is strong consumer confidence, and that seems to be what is holding the whole economy back.

That said, moving along rather slowly, just like the economy, is better than the days of going negative. With all the things that seem to bother consumers apparently not going away in the near future, we continue to expect somewhat more of the same next years. The good news for us is that in spite of the lower confidence, we are still selling more furniture and related items. That is a good thing.

We hope you all have had a great Thanksgiving holiday, enjoyed your favorite meal(s) and are ready to go into the end of the year with a good finish.

Kenneth D. Smith,

Smith Leonard PLLC