By: Furniture World Magazine 
After a rebound year in 2004, with growth at 5.5 percent for residential furniture manufacturers and distributors in our survey, 2012 provided some more growth in shipments—3.3 percent—according to our monthly surveys of these companies.


Our annual survey, which has some difference in the make up of participants, indicated a growth rate of 3.0 percent, so the results were very similar. New orders in the monthly survey were up 2 percent.

The upholstery group led the way in the annual survey with shipments increasing 4.4 percent, while the case goods group was up only 0.5 percent. The smaller group in the miscellaneous category increased almost 7.0 percent.

As with 2004, the first half of the year was better than the second half, with overall shipments up slightly over 5 percent. That growth rate fell to 2.8 percent in the third quarter and was only 0.5 percent in the fourth quarter.

As we have noted in Furniture Insights, there has been a wide range of results among the participants. Some 38 percent of our participants reported an increase in shipments for the year. This compared with 56 percent reporting increases in 2004. Many of the participants reported double-digit increases for the year, although there were those who also reported double-digit declines as well. About 40 percent of the participants in the monthly survey reported increased orders.

For the first quarter of 2013, new orders increased 5 percent compared to the first quarter of 2012, while shipments were up 2 percent for the quarter. Based on recent conversations, business has been “spotty” at best. Some retailers had good Memorial Day sales, but others complained that the holiday sales were not good at all.

Forecast

Our latest projections indicate a growth in shipments of about 3 percent for 2013. These projections anticipate a growth rate in shipments of about 1.4 percent in the first half of the year. In the second half, shipments are projected to increase just over 5 percent.

The last half of 2012 leading into 2013 has been an interesting time. While housing has finally started to calm down, prices remain high. With consumers buying larger, more expensive homes, while rates were low, the mortgage payments are generally higher. Add that to higher gas prices, and consumers do not have the disposable income that they had before.

Consumer confidence has not been that strong, especially when looking to the future. In addition, as we have discussed before, consumers are now spending $75 to $400 a month, or more, on cell phones, internet connections, satellite radios and TV connections, cable, etc…all monies that most families were not spending a few years ago. And, these expenses are much deeper in the economy than they have ever been, as almost all families now have one or all of the above.

These bills, just like mortgage payments, which are higher, utility bills (also higher due to larger houses), come every month. It used to be that a family could buy a new TV and pay for it over three to six months, and then buy something else. The cost of the items noted above are not going away and are taking $900 to $5,000 away from families’ ability to buy furniture.

With all that said, furniture continues to be sold. There is no doubt that imports continue to affect the dollar amounts of furniture being sold. The number of pieces is likely up much more than the dollars. In addition, the prices of imports continues to put pressure on domestic producer prices as well, forcing prices down and keeping price increases from what they need to be.

With furniture purchases deferrable, consumers can just wait until they see another deal at so much off. And we as an industry have not figured out yet how to make consumers “want” to buy. Without such desire, they will continue purchasing when they “have” to and to wait on the sales.
Key Statistics Summary

The results for the annual operating statistics were interesting this year. While there were some changes in participants, the overall results for profitability were less than desirable in certain categories.

Gross profit margins increased slightly from 21.47 percent in 2004 to 21.64 percent in 2012. Operating profits (gross profit less selling and administrative expenses) fell from 5.26 percent to 3.69 percent.

As with our surveys in the past, we have 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”) in order to have better comparisons.

For both-year participants, the results were a little different. Gross margins fell slightly from 21.55 percent to 20.72 percent. Operating margins declined from 5.03 percent to 3.50 percent.

Case Goods

In the case goods category, gross profits increased to 25.16 percent in 2012 from 22.69 percent in 2004. Both-year participants’ gross profits increased to 22.92 percent from 21.43 percent. Operating income decreased to 5.36 percent from 6.39 percent in 2004. This was a result of better gross margins offset by higher selling expenses.

Both-year case goods participants’ operating profits increased to 4.98 percent from 4.05 percent, reflecting the increase in gross margins offset by higher selling expenses.

The slight increase in operating income was mixed among the both-year participants. Approximately 60 percent of the both-year case goods participants reported an increase in operating profits while 53 percent reported increased gross profit margins. Again this year, there were several participants that reported negative operating margins, but most either improved their results or turned them around.

Upholstery

In the upholstery category, results were also somewhat mixed. Overall, the gross profit margin decreased to 19.55 percent from 20.65 percent in 2004, but operating profit margins fell from 4.56 percent to 2.71 percent.

Similar results were reported among the both-year participants. Gross margins decreased for both-year participants to 19.58 percent from 20.68 percent. Operating margins declined, falling to 2.77 percent from 4.50 percent. The decline in operating margins was caused primarily by the 1.1 percent decline in gross margins and an increase in administrative expenses of 0.56 percent.

Almost one-half of the percent of both-year participants’ gross profit and operating profit margins declined. This marked two years in a row that at least half of the participants reported declines in both categories.

Gross Margins

In case goods, the improvement in gross margins for both year-participants was attributable to a 1.3 percent decrease in material costs, a 1.5 percent decline in labor costs offset by a 1.3 percent increase in overhead costs. The decline in material costs in 2012 of 1.3 percent offset part of the increase of 2.3 percent in 2004. We are not sure of the reasons behind this, as a majority of the participants (60 percent) actually reported increased material costs. We suspect that some of the decline may have been attributable to plant closings and discounts given in 2004 in an effort to flush excess inventories.

If discounts were higher in 2004, this also would have tended to make labor costs as a percent to net sales higher. And, as we have seen for several years, increased imported products will drive down direct labor costs as the mix of imports versus domestic product shifts towards imports.

The reason for the increase in overhead was not clear as over one-half the participants reported declines in overhead as a percent to sales. Some of this increase may be attributable to higher outgoing freight costs for those companies who now report freight revenues in sales and freight costs in cost of sales (based on the new accounting rules in effect for the last few years).

In upholstery, the decline in gross margins for the both year-participants of 1.1 percent was primarily attributable to an increase in materials costs of 1.7 percent offset by a reduction in labor costs of 0.96 percent. The increase in material costs, we suspect, was primarily attributable to higher costs of petroleum based products (foam, certain fibers and fabrics, etc…) caused by the hurricanes and some by the effect caused by the importing of more cut-and-sewn covers which would add to material costs and reduce labor costs.

The decline in labor would be attributable to the above cut-and-sewn cover issue, as well as some of the increases for material costs that were charged to customers in the form of surcharges for foam and freight. Thus, selling prices were raised for these items, but labor costs would not have increased, causing a drop in labor as a percent to sales. Overhead costs were essentially unchanged.

Other Factors

Factory payrolls as a percent to sales decreased in 2012 to 16.12 percent from 17.91 percent. There was a decline of 2.5 percent in case goods where those payrolls declined from 17.35 percent to 14.86 percent. The decline was similar with the both-year participants where factory payrolls declined 2.14 percent. These declines were primarily in direct labor, but indirect labor also declined about .5 percent.

Upholstery factory payrolls declined from 18.24 percent to 16.87 percent. Both-year participants decreased 1.55 percent from 18.30 percent in 2004 to 16.75 percent in 2012. Again, while most of the decline was in direct labor, there was also about a .5 percent decline in indirect labor as well.

We believe that the decline in factory payrolls in case goods as a percent of sales was primarily a result of the impact of imports, with sales of those products increasing, but not requiring the same amount of factory labor. Some of the decline may also be attributable to some plant closings with extra production shifted to other plants. The decrease in upholstery actually brought the percentage back in line with 2003 results. With more cut-and-sewn products coming in and more leather in the mix, we would have expected these percentages to decline.

Shipments per factory employee also increased. Both year participants increased in the case goods category to $160,000 from $140,000 last year. Shipments per factory employee in upholstery for both year participants also increased with current year shipments per employee at $160,000 versus $151,000 last year. Overall, shipments per factory employee improved to $158,000 from $147,000 last year. Most of these increases likely relate to more imported product, as well as the increase in shipments—allowing more products to be made and shipped without adding employees.

Operating profits per factory employee declined in 2012 from $7,751 last year to $5,839 in 2012. For both-year participants, the results were almost equal, with operating profits per employee at $5,592 in 2012 compared to $7,437 last year. The results between categories were somewhat different. In case goods, operating profit per factory employee fell from $8,968 in 2004 to $8,406. In upholstery, operating profits fell from $6,945 to $4,298 in 2012.

Working capital decreased 4.33 percent after a 7.6 percent increase last year with the ratio of current assets to current liabilities decreasing slightly to 2.97 to 1 from 3.16 to 1 last year.

Inventories decreased 2.35 percent after a 13.86 percent increase last year. As would be expected, inventory turns improved to 4.52 times in 2012 versus 4.28 in 2004. Case goods turns were about the same at 3.18 versus 3.20 in 2004, while upholstery turns were 5.82 times versus 5.41 last year.

The return on equity increased this year. Returns on equity were 7.00 percent in 2012 versus 5.64 percent last year, but still quite below the 12.08 percent in 2002.

Days sales in receivables were very good for the year. Days sales (average daily sales divided into year-end receivables) were 40.60 in 2012 compared to 46.29 last year.

National

The overall economy continues to move along with reasonable growth in the GDP since the second quarter of 2003. The GDP grew 3.0 percent in 2003, 4.4 percent in 2004, 3.5 percent in 2012 and first quarter 2013 estimates indicate growth of 5.3 percent. The Federal Reserve continues to worry that the economy is overheating and have fears of inflation so they continue to raise interest rates.

The Conference Board’s Index of Leading Economic Indicators has decreased 0.2 percent during the six months ended May 2013 after a drop of 0.6 percent in May and declines in three of the six months in that period. Three of the ten components advanced in May. The largest negative contributor was the decline in housing permits.

The stock market performed well in 2012, but since May 2013, has been very unstable. Lately it seems that anything from a broken fingernail to a fifty-cent change in a barrel of oil causes a significant change in the market. The Dow reached a high of over 11,600 in early May, then dropped below 11,000, but recently has climbed back to the 11,000 range.

The unstable markets continue to have a negative impact on consumer spending. Consumers are not seeing their retirement accounts growing as they did before. That tends to make consumers think twice about spending or adding to their debt loads, especially for deferrable purchases such as furniture.

Housing

The housing market has finally begun to cool down. The year 2012 was another record- breaking year for housing sales. Most expected a cooling down period in 2012, but it did not materialize. Most expect to see 2013 reflect slower sales after several record-breaking years in a row. The first few months of the year are showing that trend. With interest rates edging up, the cooling off has been expected. Meanwhile, the second-home market continues to expand.

The National Association of Realtors has reported that they expect the housing market to trend lower in the second and third quarters before rebounding in the fourth. Even with some slower sales, housing sales are still expected to remain at very strong levels. Home prices have continued to rise, which has some concerned that there may be a bubble in pricing.

Consumer Confidence

Consumer confidence, as measured by the Conference Board’s Consumer Confidence Index, rose steadily from October 2012 to April 2013 where it reached a four-year high, but fell in May. The Index at the end of May was 103.2, down from 109.8 in April. In May 2012, the index stood at 102.2. For comparison, prior to 9/11, the index was in the 115-range. The Present Situation Index in May decreased to 132.5 from 136.2. The Expectations Index fell to 83.7 from 92.3 in April. Last year in May, the Expectations Index was at 92.5.