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Monthly Survey Of Furniture Business From Smith Leonard Accountants & Consultants

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Monthly Results New Orders New orders in September 2007 were 2 percent lower than orders in September 2006 according to our most recent survey of residential furniture manufacturers and distributors. Orders were 14 percent higher in September compared to August, but that is somewhat normal with August typically slower with some pick up after Labor Day. For comparative purposes, September 2006 orders were 10 percent lower than September 2005. Similar to August results, some 62 percent of our participants reported lower order levels. Year-to-date, new orders remained 4 percent below last year. Through September 2006, orders were 2 percent below 2005’s first nine months, but that was somewhat skewed due to increases in the first quarter of 2006 over the first quarter of 2005. Approximately 68 percent of the participants reported lower orders for the first three quarters. Shipments and Backlogs Shipments in September were 5 percent below September 2006 levels and were 3 percent higher than August 2007. September 2006 shipments were 3 percent lower than September 2005. Some 76 percent of the participants reported lower shipments in September versus September 2006. With the impact of timing of import shipments, shipments no longer seem to follow orders in any given month. Year-to-date, shipments remained off 6 percent from the first nine months of 2006. Approximately 74 percent of the participants reported lower shipments year-to-date versus last year – compared to 71 percent last month. Backlogs in September were 4 percent lower in September 2007 than September 2006 versus an 8 percent decline reported in August. Backlogs increased 1 percent over August levels. Receivables and Inventories Receivables were 2 percent lower than September 2006 levels and 3 percent higher than August. The comparison to August was in line with the increase in shipments over August but was not in line with year-to-date shipments or the decline in shipments comparing September 2007 to September 2006. We know that some companies are offering extended terms to assist retailers, but we believe receivables will need to be watched very closely with the troubles at some of the retailers. Inventories were even with August levels and were 10 percent lower than last September. This compares to an 11 percent decrease last month. Inventory levels seem to remain in decent shape, considering business at retail and the impact of direct shipments for imports. Factory Employees and Payroll Factory payrolls increased 3 percent over August 2007 and were 5 percent lower than September 2006, down slightly from the 7 percent decline reported in August. Payrolls remained 8 percent below the first three quarters of last year, reflecting lower business volume and more imported products. The number of factory employees remained the same in September 2007 compared to August 2007 and were down 10 percent compared to last September. This compared to a 12 percent decline last month, but remained pretty much in line with results of the last twelve months reports. National Consumer Confidence Declining since the summer months, The Conference Board Consumer Confidence Index declined again in November. The index was reported at 87.3 down from 95.2 in October. The Present Situation Index decreased to 115.4 from 118.0 in October. The Expectation Index declined to 68.7 from 80 in October. Lynn Franco, Director of The Conference Board Consumer Research Center said, “This month’s deterioration in confidence was due primarily to the sharp decline in the Expectations Index. Consumers’ apprehension about the short-term outlook is being fueled by volatility in financial markets, rising prices at the pump and the likelihood of larger home heating bills this winter. In fact, consumers’ inflation expectations have surpassed the spike experienced this spring and a larger percentage than last month expect stock prices to decline. The Present Situation Index, despite losing ground, still suggests the economy is expanding, albeit slowly. Despite this rather bleak outlook, consumers have not lost their holiday spirit and anticipate spending more on gifts this season than they did last Christmas.” Consumers’ expectations for the next six months plummeted in November. According to the report, those expecting business conditions to worsen increased to 16.7 percent from 13.9 percent. Those anticipating business conditions to improve declined to 12.4 percent from 14.0 percent. The Reuters/University of Michigan Surveys of Consumers also reported lower results, with their consumer confidence at its lowest level in two years. “Rising prices for fuel and food had a devastating impact on household budgets, and falling home prices have diminished consumers’ sense of financial security,” according to Richard Curtin, the Director of the Reuters/ University of Michigan Surveys of Consumers. Although still above the point that signals an impending recession, the diminished level of consumer confidence indicates that consumer spending growth will nearly come to a halt in the closing months of 2007 and in the first few months of 2008. “The engine of consumer spending is expected to sputter at the turn of the year but not stall, and slowly gain speed in the last half of 2008,” Curtin said. The risk that a recession develops is uncomfortably large, however. “The primary risks reflect how low home prices will ultimately sink and how far fuel prices will ultimately climb,” noted Curtin. According to the report, the Index of Consumer Sentiment was 76.1 in the November 2007 survey, down from 80.9 in October, and significantly below the 92.1 recorded in November of 2006. The Index of Consumer Expectations, a closely watched component of the Index of Leading Economic Indicators, was 66.2 in the November 2007 survey, down from 70.1 in October, and well below the 83.2 recorded last November. The Current Economic Conditions Index was 91.5 in the November 2007 survey, down from 97.6 in October, and significantly below the 106.0 recorded last November. The recent Michigan surveys have recorded the largest gap in more than a quarter century in how different income groups assessed their financial situation. The record gap was due to both the impact of rising prices as well as the frequency of income increases. The devastating impact of high fuel and food prices on the budgets of households in the lowest third of the income distribution meant that 60 percent reported a worsening financial situation. In contrast, among the top third of the income distribution, widespread income gains have meant that just 22 percent reported being worse off financially. Also according to the report, buying plans for homes, vehicles, and large household durables each fell in the November survey. The last time views on buying conditions for household durables—furniture, appliances, home electronics, and the like—were less favorable was fifteen years ago. “The current situation as well as in the early 1990’s are similar in that consumers were more apprehensive about their overall financial situation, especially given their debts and savings,” Curtin explained. The media accounts of foreclosures have made consumers more sensitive to credit risks and has increased their desire to reduce their debt and increase their savings. “Consumers have become more prudent and more interested in rebuilding their reserve funds as a precaution against any future adverse economic developments,” added Curtin. Leading Economic Indicators The Conference Board reported that the U.S. leading index decreased 0.5 percent, while the coincident index remained unchanged and the lagging index increased 0.3 percent in October. The leading index decreased sharply in October, following a small increase in September. Most of the leading indicators contributed negatively to the index in October, led by large declines in housing permits, initial claims for unemployment insurance (inverted), and index of consumer expectations. Stock prices, real money supply, and manufacturers’ new orders for consumer goods and materials were the only components that contributed positively to the index this month. The leading index fell 0.5 percent (a decline of 1.0 percent annual rate) from April to October, and the strengths among its components remained balanced with the weaknesses during the past six months. Three of the four indicators that make up the coincident index increased in October. The positive contributors to the index – beginning with the largest positive contributor – were employees on nonagricultural payrolls, personal income less transfer payments, and manufacturing and trade sales. The negative contributor was industrial production. Gross Domestic Product (GDP) Real gross domestic product ― the output of goods and services produced by labor and property located in the United States ― increased at an annual rate of 4.9 percent in the third quarter of 2007, according to preliminary estimates released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 3.8 percent. The increase in real GDP in the third quarter primarily reflected positive contributions from exports, personal consumption expenditures (PCE), private inventory investment, equipment and software, federal government spending, nonresidential structures, and state and local government spending that were partly offset by a negative contribution from residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased. The acceleration in real GDP growth in the third quarter primarily reflected accelerations in exports, in PCE, and in private inventory investment that were partly offset by an upturn in imports, a larger decrease in residential fixed investment, and a deceleration in nonresidential structures. Housing According to the National Association of Realtors (NAR), single-family home sales were stable in October while the condo sector was down. It was noted that the lingering effects of the credit crunch were a drag on sales. Total existing home sales eased by 1.2 percent and were 20.7 percent below September 2006. Lawrence Yun, NAR chief economist, expected the sluggish performance. “As noted last month, temporary mortgage problems were peaking back in August when many of the sales closed in October were being negotiated. We continue to see the biggest impact in high-cost markets that rely on jumbo loans,” he said. “Mortgage availability has improved as evidenced by much lower mortgage interest rates and a sharp jump in FHA endorsements for home purchases. “A trend away from subprime mortgages to FHA loans, which often carry much lower interest rates, is a positive development for consumers and the housing market going forward. Still, it will take some time for the change to yield a measurably higher closed sales volume in the aftermath of the subprime collapse. In the near term, we expect home sales to remain fairly stable.” The national median existing-home price for all housing types was $207,800 in October, down 5.1 percent from October 2006 when the median was $218,900, but there is a downward distortion from the temporary problems with jumbo loans that slowed sales in high-price markets, and that dragged down the national median. NAR President Richard Gaylord, a broker with RE/MAX Real Estate Specialists in Long Beach, California, emphasized that all real estate is local. “Keep in mind that home prices are up in 93 out of 150 metro areas, and there is a lot of confusion in the market from reports about national data. Broadly speaking, home prices in most areas are up modestly or fairly stable,” he said. “Areas with population or job growth are seeing the strongest home price gains.” Single-family home sales were unchanged from September at the seasonally adjusted annual rate of 4.37 million in October, and are 20.8 percent below 5.52 million-unit level in October 2006. The median existing single-family home price was $205,700 in October, down 6.3 percent from a year ago. Regionally, existing-home sales in the Northeast were unchanged at an annual pace of 900,000 in October, and are 12.6 percent below October 2006. The median price in the Northeast was $258,700, up 1.3 percent from a year ago. Existing-home sales in the South also were unchanged in October, at an annual rate of 2.03 million, but are 19.4 percent below a year ago. The median price in the South was $171,400, down 6.7 percent from October 2006. In the Midwest, existing-home sales slipped 1.7 percent to an annual rate of 1.18 million in October, and are 16.9 percent below October 2006. The median price in the Midwest was $164,000, down 1.6 percent from a year ago. Existing-home sales in the West fell 4.4 percent in October to a level of 870,000, and are 33.1 percent below a year ago. The median price in the West was $318,200, which is 6.9 percent lower than October 2006. Sales of new one-family houses in October 2007 were at a seasonally adjusted annual rate of 728,000, according to the U.S. Census Bureau. This was 1.7 percent above the revised September rate and was 23.5 percent below the October 2006 estimate. The number of new homes on the market represents an 8.5 month supply. Single family housing starts in October were 7.3 percent below the September estimates according to the U.S. Census Bureau. The rate was 25.1 percent below the October 2006 results. Consumer Prices The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in October before seasonal adjustment according to the Bureau of Labor Statistics. The October level was 3.5 percent higher than in October 2006. On a seasonally adjusted basis, the CPI-U increased 0.3 percent in October, the same as in September. The index for energy advanced 1.4 percent in October, with the index for petroleum-based energy up 1.5 percent and the index for energy services, 1.3 percent. The food index rose 0.3 percent in October. The index for all items less food and energy advanced 0.2 percent in October. During the first ten months of 2007, the CPI-U rose at a 3.6 percent seasonally adjusted annual rate (SAAR). This compares with an increase of 2.5 percent for all of 2006. The index for energy, which increased 2.9 percent in 2006, advanced at a 12.3 percent SAAR in the first ten months of 2007. Petroleum-based energy costs increased at a 20.6 percent annual rate and charges for energy services rose at a 2.7 percent annual rate. The food index has increased at a 5.5 percent rate thus far in 2007, following a 2.1 percent rise for all of 2006. Excluding food and energy, the CPI-U advanced at a 2.3 percent SAAR in the first ten months of 2007 after increasing 2.6 percent in 2006. Retail Sales According to the U.S. Census Bureau advance estimates, U.S. retail and food services sales for October, adjusted for seasonal variation and holiday and trading-day differences, increased 0.2 percent from September and increased 5.2 percent above October 2006. Retail trade sales were up 0.1 percent and were 5.1 percent above last year. Gasoline station sales were up 16.3 percent from October 2006 and sales of nonstore retailers were up 5.9 percent. Sales at furniture and home furnishings stores in October were slightly above September sales but were down about ½ percent from October 2006. On an adjusted basis, sales were 1.8 percent below last year same month. For the 10 months, sales at these retailers were reported to be up 1.9 percent. Employment Nonfarm payroll employment rose 166,000 in October and the unemployment rate was unchanged at 4.7 percent according to the Bureau of Labor Statistics. Job gains were reported in professional and business services, health care, and leisure and hospitality. Manufacturing employment continued to decline. Durable Goods Orders and Shipments According to the U.S. Census Bureau advance reports, new orders for manufactured durable goods in October decreased 0.4 percent. This was the third consecutive monthly decrease following a 1.4 percent decrease in September. Excluding transportation, new orders decreased 0.7 percent. Excluding defense, new orders decreased 0.9 percent. Shipments of manufactured durable goods in October increased 0.6 percent following two months of declines. According to the final report for September, orders for furniture and related products were up 4 percent over August and were 5.6 percent below September 2006. Year-to-date orders were reported off 4.2 percent. Shipments were reported 5 percent below September 2006 and were off 5.1 percent for the first nine months. Summary These are very interesting times in the furniture industry ― or rather very difficult times. With business at retail continuing to be very sluggish, many retailers as well as manufacturers and distributors are continuing to struggle. There are so many pieces to the puzzle that do not seem to always fit very well. The news about the demise of Levitz is not good for the industry. Years ago when Heilig, Sears, Levitz and others went out, I was reminded by several industry veterans that these bankruptcies have an overall very negative effect on the industry as a whole. One might think that consumers just go down the street and buy from someone else, but the loss of advertising by a major retailer has an overall negative effect on total sales in the area where these stores are located. Add to that, the impact of changes expected from China. The reports of plans to change the tax rebates from the government, more floating of the currency and rising costs for Chinese manufacturers, it appears that prices from China are starting to move up and will likely have to go higher. This may help domestic manufacturers and distributors put through some sorely needed price increases. But with the overall economy weak, the continued problems caused by the mortgage and housing industry and weak consumer confidence, sales even at better prices are not likely to move up significantly for a while. The National Association of Realtors report was interesting in pointing out that housing industry is not as bad as the media makes it out to be, if you look at the details versus just the overall picture. The same can be said for the furniture industry. In our own survey, we continue to see a wide range of results from participants. We see some with increases in orders in double digits (admittedly not many) and at least the 32 percent of participants reporting some gain. We also see, in those with negative results, some are down serious double digits. We continue to read reports about the economy possibly moving into a recession. The scary part about those reports is that, from historical results, the experts really do not know until some six months after the start of one that we really are in one. With all that said, many of the experts do not believe we will go that far. So assuming we do not, the key will be to hang on until business begins to pick up ― expected to be in the last half of 2008, by many. The thing to keep your focus on is what we have always said ― furniture is being sold. Maybe not enough, but even in “recessions,” furniture is being sold. The key is not to focus on selling all the furniture in the world. The key is getting your share. Unfortunately, in these times, getting your share will mean taking someone else’s share. In this case, we do not yet have a rising tide lifting all boats. Here is to you getting at least the share you need to keep you alive until times get better. We hope that when taking someone else’s share, it is not done on price alone, but based on real value of product and service. Remember the story about selling truckloads of watermelons at a loss on each one. Selling more without reasonable margins will not solve the problems for retailers or manufacturers. This Furniture Insights® newsletter report has been re-published with the permission of Smith Leonard PLLC an independent member of the BDO Seidman Alliance. Firm Profile: Founded in 1930 by BDO Seidman, LLP, the High Point, North Carolina practice was recently acquired by four individuals who have spent the majority of their 100+ year careers building the existing practice. Beginning January 1, 2007, Smith Leonard PLLC became an independent member of the BDO Seidman Alliance. Partners are Ken Smith, Darlene Leonard, Jon Glazman and Mark Bulmer. Among the firm's 32 employees are 18 CPAs.??Service Area – Smith Leonard concentrates primarily in the Triad, but also services companies with domestic locations throughout North Carolina, Virginia, South Carolina and Texas. Smith Leonard has an extensive network of international relationships that helps service their clients’ needs throughout the world with locations in Asia, Europe, South America, Mexico and Canada. These companies range in revenue size of $2 million to $300 million.??Practice Concentration – The majority of the client base is composed of manufacturing and distribution companies. Many of its clients are either furniture manufacturers, distributors or suppliers to the furniture industry. Smith Leonard also services companies in retail, transportation, insurance, not-for-profit entities and employee benefit plans. Smith Leonard offers a full range of accounting and consulting services including audits, compilations, reviews, tax planning and compliance. The partners and staff of Smith Leonard also assists clients in mergers, acquisitions, business consulting, cash flow projections, and tax outsourcing. Individual clients benefit from extensive experience in family wealth services including estate tax planning.??The firm continues to produce monthly and annual statistics for the furniture industry. For more information call (336) 883-018 or e-Mail: ksmith@smithleonardcpas.com.

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