A bear market? Plunging demand? These 4 analysts tell you what’s next

HIGH POINT — Declining consumer demand, coupled with rising inflation has put increased pressure on furniture retailers and manufacturers to keep their businesses moving in a positive direction this spring. For some the task has proved difficult as there are increasing reports of layoffs and closings across the furniture and mattress sectors.

The news in June that the stock market had  officially entered a bear market, coupled with a series of interest rate hikes by the Federal Reserve has rekindled talk of a coming recession.

To put in perspective what these economic disruptions mean for the furniture industry sister publication Furniture Today reached out to leading  industry analysts to get a more specific perspective on where the industry is headed in the coming months and what steps companies may need to take in order to maintain positive momentum for this latest disruption.

Here’s what they had to say:

Jerry Epperson, managing director, Mann, Armistead & Epperson, LTD

The stock market has an incremental benefit to the industry when it’s strong. We feel it a little bit when it’s weak. Only 20% of the American population has an investment portfolio that they watch carefully. They know when it’s weak, however this doesn’t necessarily impact their month-to-month income.

What’s more important is the housing industry. Increases in interest rates has an impact on housing turnover. Mortgage payments from a year ago are almost 60% higher. That’s what we’re watching carefully. Direct tie with someone moving into a new dwelling and furniture demand. People that buy homes spend twice as much on furniture and mattress as those who rent. Home ownership has been going up. Young people want to own homes- millennials are aging into the ability to own a home. I don’t see anyone forced away from the housing market. What you’ll see is there will be new types of loans that will allow people to buy homes. They may be ARMs; they may be fixed rate for two decades and then a balloon loan financed. Some cases, they may rent the property in a rent to own scenario. All options out there just advertised and promoted more.

The stock market perceives our industry as being consumer and housing driven. When we had the downturn in 2008, consumers were suffering, and housing and banking were all suffering- that was a lot worse than what we’re looking at now. There isn’t as large a potential for foreclosures because loans are better today.

We have a lot of product coming into retailers right now that was ordered last year just as consumers aren’t coming into the store. Backlogs are way up at a lot of retailers. Both brick and mortar and online retailers are asking manufacturers to hold off on deliveries. They want to wait and see as they have no place to put inventory. Some retailers are keeping trailers and rail cars because they have no place to put the furniture.

I expect that shipping rates will be coming down in 2023. Over the last ten years, there has been tremendous consolidation in the shipping industry with four companies controlling 50% of the industry. Shipping companies made four times the money than they have ever before, and the rates and rate increases won’t hold. If we can’t get shipping/logistical packages from overseas to our stores more affordable than it is right now, imports will lose market share if the shipping rate is more than the value of the product.

We have very little control over the consumer. Furniture is an easily deferrable purchase. Part of our problem is that in 2020 and 2021, our retailers decided they didn’t need to advertise as much because they got as many sales as they did without advertising.

Right now, we need to get back onto how we got here—advertising and marketing. Our stores need to get back out there and promote, advertise. Our vendors need to get back into the market and advertise their products and tell people what they have and get some confidence in ourselves. The furniture industry offers a tremendous value to consumers, more so than other consumer products. People can personalize their home. We have to have to promote ourselves to the end user whether it’s the consumer or the retailer.

 

Peter Keith, managing director, senior research analyst, Piper Sandler

We started to see the economic backdrop impact on various groups at different times. Lower income spending began to soften in late 2021 with gas price inflation and the wearing-off of stimulus. Middle income spending began to soften in March/April due to the war in Ukraine and spikes in gas and food prices. Upper income spending is beginning to soften with May and June. While these households are good with savings rates and balance sheets, they are pausing and pulling back.

The larger companies have a little stronger advertising muscle as well as broad-based omnichannel strategy. This is critically important even in a tough backdrop. Consumers wants an omnichannel experience and companies need technology capabilities. In the last two years, companies haven’t had to advertise just keep up with inventory. Now it’s pivoting back.

One thing to be aware of with branded DTC companies which tend to be in a single category. They are very disrupted by privacy changes with Apple and Google. A lot that was built on performance/targeted marketing is becoming more difficult with privacy solutions.

No two recessions are exactly alike. This is more of a consumer goods recession. If you draw any comparisons, it should be to 2001 which was preceded by capex recession. At the time, there was so much spending in preparation for Y2k and then a big pullback in spending. Similarly, there has been large overspending on household goods with Covid and now that consumers are shifting spend to other spaces there is a ripple effect with inventory levels up and companies probably having over-hired.

It’s obviously critical that companies manage their expense structures and balance sheet. A recession is a shorter-term phenomenon. Companies that continue to make investments (even modest) can emerge stronger than before and their competition gets left behind. This is really about economic health– advertising and driving consumer interest.

There’s been a strong housing backdrop the last two years with a lot of movement/home sales and a strong catalyst to buy furniture. That’s slowing down. At the same time, consumers generally don’t buy all the furniture they need in the first six months of buying a home, there’s a lot of work that goes over the next 3-5 years as they furnish their home and make it their own.

Ken Smith, founding partner, assurance partner, Smith Leonard

I think we knew that the good business we had in the last half of 2020 and 2021 wasn’t going to last forever. A lot of us were surprised that this lasted as long as it did. The benefit that the residential side of the industry has is that backlogs are so big we have some time to see how this is going to play out.

We expected new orders to fall off. But with the inflation situation as well as the economy and impact of war etc. is that going to take it down further then it would have gone by itself? How much further is the $64,000 question.

The good news to me is that the banks aren’t in the same boat as in 2008. Furniture companies seem to be stronger than they were at that point in time. The furniture brands aren’t around anymore that were giving away product. We are in better shape to weather what will come.

I just wrote in my newsletter that we may find out a couple of months from now that we’re already in a recession. What companies need to do right now is take a look and say: What could a downturn look like? Make some plans for scenarios: if sales go down (in units) 15%, what adjustments would we need to make? If it’s down 20-25%, you should already have a plan in place- at least you’ve got it planned, so that when it comes, you’re ready. If you think it’s going to drop 25%, take a look at what you looked like as, say, a $75 million company versus $100 million company.

As hard up as we were for people, we made hires we probably wouldn’t have done today. There’s your first cut, if needed. However, the industry is still adding jobs—there’s a whole lot of things that are good now. There is still demand out there, but different segments of the industry will be affected differently. For the affluent, the economic issues don’t affect their buying. At the lower end, the consumer needs money for gas.

One thing I’ve always said about our industry is that we think of it as one industry and it’s not. We have 2200 odd exhibitors but they’re all selling different products to different markets- high end, low end, occasional, etc.

In terms of forecasting today, for what’s “normal” we need to look back at last couple of years in order to project growth. 2019 was the normal, but now it needs to be adjusted for price increase. Companies had to give a lot of raises to keep/hire staff. So, use that cost structure based on an adjusted volume structure.

When supply chains work, the import model works well. When you don’t have control, that changes things. It’s true to some degree in Mexico- you may own your plants and that gives you some control- but you don’t have control over Vietnam or China with supply-chain disruptions.

In terms of industry consolidation/acquisition, the companies who can really do that are public companies who have the access to capital to do more as opportunities become available. However, the larger companies don’t want to fool with buying something small. A lot of the smaller companies are driven by baby boomers aging out- do they have the kids coming in behind that even want it? If not, those are the opportunities that will be there to scarf up, if they are a good fit.

Bo Stump, partner, Stump & Company

An important thing for home furnishings is take a step back. The growth from 2019 through 2021 was really unprecedented. We like to remind folks here that yes, demand appears to be waning but when viewed holistically, not a whole lot, if any, are down compared to 2019. Some of that is driven by cost increases due to ocean freight, labor, supply chain etc. so companies haven’t been hit as badly as one might think.

One example: During Covid, Wayfair grew from $9 to $14 billion in sales. So, we start there. We think a lot of retailers clearly are over-inventoried and we’re used to 9-12 month lead times. We’re watching closely over the next two months to see what happens there. With lower price point goods, it’s not surprising that it’s the first area to feel that pullback. The luxury segment more resilient. That’s our expectation. Some clients have quipped they’re used to selling $350-$500 sofas. Once these go up to $650 to $700 that’s a non-starter for the end-user.

A lot of our clients are flat versus last year. There are some reasons for optimism but there are all these compounding factors that have made this difficult over the past two months. Lots of noise and lots of bad indicators. However, a decent number of clients say the cliff has already happened and now we’re in treading water. Time will tell. Some believe the worst is already over.

The general economy depends on how you view it. Some at the Fed are saying it’s not a fait accompli at all in terms of recession. And Goldman just upped the odds of a recession. It’s more of a pick your own adventure of what you feel the next 12-18 months will entail. Our team at Stump took a middle view that there is certainly a softening in the demand.

Our position as a firm that to prepare for real slackening, but to look at opportunity. For instance, with M&A on the sell side, for business owners looking to sell. There is an opportunity for bigger companies to become more active across all distribution channels- warehousing, e-commerce and brick and mortar. It’s a real advantage to being larger and able to afford full teams for purchasing and logistics and marketing. Smaller companies don’t have those advantages.

Our firm is expecting to stay busy no matter the macro environment. It could be a smaller player looking for a larger partner to navigate these stormy waters. Folks will be looking for avenues for growth and market share. Companies are thinking longer term- they want to get into other categories to round out the home- lighting, rugs, etc. Or they are looking for new avenues of distribution. Maybe a wholesaler is looking for brick and mortar, e-commerce or direct to consumer. I’m expecting a lot of that over the years.

Some companies have surprisingly resilient top and bottom margins. Higher price point luxury good producers don’t have the same level of concern. It’s not that they aren’t paying attention to the economy but given that they’re making products here- they couldn’t grow 50% a year like the overseas producers. From a P&L perspective they aren’t as lumpy as well.

With private equity, they have invested for a specific period of time. There is expectation of more investment in the industry. A lot of it may be more shuffling the deck—one PE firm sells holdings to another one. There could be a period of shuffling and consolidation among companies.

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