Interest Rate Cuts Provide Ray of Hope for Furniture Industry.

THE U.S. FURNITURE INDUSTRY should be a big benefactor of the latest round of interest rate reductions by the Federal Reserve, observed analyst Jerry Epperson.

Epperson expressed cautious optimism during an April 19 presentation at the International Home Furnishings Market in High Point, NC.

"It is unusual to have good news on the opening day of the Market," the managing director of Mann, Armistead & Epperson investment bankers said. The April 18 half-point cut, larger than anticipated and the fourth such rate reduction since Jan. 1, could send mortgage rates slipping and home sales rising during summer and fall, Epperson said.

"Interest rates are going to help ... in the months we need it the most," he predicted, naming May through September as the crucial months for furniture buying. "If we have a brisk housing season this summer, we're going to get the business in the fall," he said.

Epperson, whose talk was sponsored by the Ontario and Quebec furniture manufacturers' associations, tracked the slide in furniture sales that he said began in April 2000 with the low-end sector and by October-November had spread to the high end. A January blip upward was followed by disappointing numbers in February and March, he said, and April's would be even worse.

At the end of first quarter 2001, he said, nearly every publicly traded furniture manufacturer reported negative sales and earnings compared to the comparable quarter the year before. He added that retailers had 5% more inventory relative to current business conditions than they should have, while domestic manufacturers had 14% and import manufacturers had 10%. Manufacturers, he said, are putting a lot in warehouses. But, he said, he believes "this is the trough."

Home Sales Key to Furniture Sales

"The fundamental demand is there for housing," he said. A below-7% mortgage rate, historically hard to achieve, would be "a big plus for us," Epperson said.

If the loan interest rate locks in at the 6% range, he said, "the number of people taking advantage of it will surprise us." The rate is already below 7% in some cities, he said.

Epperson noted that three strong forces are pushing housing sales:

1) maturing Baby Boomers buying large homes;

2) demand for second homes and vacation homes; and

3) Baby Boomers' children buying their first homes.

In the next 10 years, he predicted, the fastest growing segment of the market will be "our children buying homes."

Besides helping boost housing sales, Epperson said, lower interest rates will make retailers more profitable and increase consumer confidence. Consumers still want furniture, but they have been delaying the purchase, he said, because of the economy's effect on their lives, or at least their perception of it.

The April market showed the effects of the sales slowdown, Epperson said. Several large manufacturers delayed introductions of new, branded collections, and some were showing more value-priced furniture and pieces that would be suitable for smaller homes.

The strongest growth during the last decade was in the highest priced goods, he said, but today it is in the lowest-priced category. Those manufacturers delaying introductions were unwilling to ask retailers to commit energy and space to promotion during an uncertain time, Epperson said. The branded collections that did make it to market -- Lexington's Timberlake Lodge, Drexel-Heritage's Jack Nicklaus, Kincaid's Laura Ashley and a Baker collection by noted designer Bill Sofield -- all had the advantage of well-known names that could attract customers, he said. He also called for more branding, saying "Branding has never been more important."

Furniture Import Growth Part of Globalization Trend

Epperson touched on a wide range of other issues affecting furniture manufacturers, from imports to retailers' closings.

In 2000, imports accounted for 34% of the residential wood furniture sold in the United States, up from 18.4% in 1992, he said. By 2000, China was both the leading and the fastest-growing source, accounting for $1.65 billion of the total $6.29 billion in imports.

"Globalization is here," he announced, pointing out that U.S. manufacturers' exports make the traffic two-way. "I don't see why there's resistance to it," he said.

The current strength of the U.S. dollar against foreign currencies makes imports cheaper by comparison, and more European manufacturers than usual were showing at the April market, he said.

Epperson said he is often asked about the Pacific Rim countries: "Can they make everything we can?"

"No, they can't," he answered. Collections with a large number of SKUs, say, 140 per collection, are not going to be efficient to make overseas, he said. Pieces that require detailed customization, as with upholstery, are also tough to make an ocean away. And the Pacific Rim's lower-priced labor does not offer much advantage in RTA, were labor is a relatively small part of the manufacturing cost.

Noting the bankruptcies of Montgomery Ward and Heilig-Meyers, Epperson said that if the industry does not get its retailers more profitable, it will have a long-term problem on its hands.