Monthly Survey Of Furniture Business From Smith Leonard Accountants & Consultants

New Orders

New orders in January 2009 were 24 percent lower than orders in January 2008, according to our recent survey of residential furniture manufacturers and distributors. New orders in January 2008 were 5 percent lower than orders in January 2007. January orders were 3 percent higher than December 2008 orders.

January’s decline was not unexpected as the trend of being off 20 plus percent from the prior year continued for the fourth straight month and followed a decline in orders of 26 percent for the fourth quarter of 2008. Approximately 95 percent of the participants reported declines in orders, compared to 89 percent for all of last year. Some 76 percent of the participants were off more than 20 percent with some reporting even more serious double digit declines. 

Shipments and Backlogs 

As would be expected with order rates so low in the last several months, shipments also fell 24 percent in January and were off 11 percent compared to December shipments.  Approximately 92 percent of the participants reported lower shipments in January 2009 compared to January 2008.

Backlogs were 22 percent lower than January 2008, as would be expected, as order rates have been off for four months in a row. Since shipments for all of 2008 were off slightly less than orders, backlogs declined in all of 2008.   

Receivables and Inventories

In January 2009, receivable levels were 23 percent lower than January 2008 levels, in line for the most part with the shipments comparison. Receivables only declined 2 percent from December even though shipments declined 11 percent from December. We continue to see receivables ageing out a bit further than we would like to see them. 

Inventories were 6 percent lower than January 2008, the same as the December 2008 to December 2007 comparison. Based on order rates, it appears that inventory levels are a bit high. Much of that we suspect is resulting from imports that were ordered before business really fell off in the fourth quarter. That plus most were carrying inventories at lower levels yet not expecting business to fall off as fast as it did. The concern here is that with a fair amount of import shipments being shipped direct to some retailers, therefore never hitting the local books, inventory levels compared to shipments and orders are somewhat masked and should probably be even lower. 

Factory and Warehouse Employees and Payrolls

The number of factory and warehouse employees fell 17 percent from January 2008, the same as last month. The number of employees fell 1 percent from December 2008.

Payrolls were down 25 percent from January 2008, up from 22 percent in last month’s comparison. Payrolls in January 2008 were 8 percent lower than January 2007. Payrolls in January were 12 percent lower than December, with employees only down 1 percent, but we suspect that was a combination of holiday pay, as well as, some shorter hours. 

National 

Consumer Confidence

The Conference Board Consumer Confidence Index™, which had declined sharply in February, was flat in March. The Index now stands at 26.0 (1985=100), up from 25.3 in February. The Present Situation Index declined to 21.5 from 22.3 last month. The Expectations Index increased to 28.9 from 27.3 in February.

Lynn Franco, Director of The Conference Board Consumer Research Center said:  “Consumer Confidence was relatively unchanged in March, after reaching an all-time low in February (Index began in 1967). The Present Situation Index suggests that the overall state of the economy remains weak and that more job losses are on the horizon. Apprehension about the outlook for the economy, the labor market and earnings continues to weigh heavily on consumers’ attitudes. Looking ahead, consumers remain extremely pessimistic about the short-term future and do not foresee a turnaround in economic conditions over the coming six months.”

Consumers’ assessment of overall present-day conditions remains unfavorable. Those claiming business conditions are “bad” rose to 51.1 percent from 50.5 percent, while those claiming business conditions are “good” edged down to 6.8 percent from 7.0 percent last month.

Consumers’ short-term outlook was moderately less negative this month. Consumers expecting business conditions will worsen over the next six months edged down to 39.1 percent from 40.7 percent, while those anticipating conditions to improve increased to 9.1 percent from 8.5 percent in February. 

Reuters/University of Michigan

According to the Reuters/University of Michigan Surveys of Consumers, the Index of Consumer Sentiment was 57.3 in the March survey compared to 56.3 in February and 69.5 in March 2008. The cyclical peak was 96.9 in January 2007. The Index of Consumer Expectations was 53.5 in March, up from 50.5 in February and nearly equal to March 2008 of 53.3.

“The good news is that the free fall in confidence has ended. The bad news is that consumers expect their financial situation to remain dismal for the rest of 2009,” according to Richard Curtin, the Director of the Reuters/University of Michigan Surveys of Consumers. The report indicated that consumers reported the largest two-month gain in confidence in the government’s economic policies, although consumers were still slightly more likely to rate economic policies unfavorably than favorably. Importantly, the stimulus package was expected by consumers to be more effective in aiding the general economy than in improving their own financial situation. Overall, consumers remained intent on increasing their saving and reserve funds even at the cost of not taking advantage of the deeply discounted prices that are now available.

The financial situation of consumers is dismal. “The fewest consumers in the history of the survey reported that their finances had improved during the past year, with an all-time record number mentioning that their incomes had declined in the past year,” Curtin said. Moreover, consumers anticipated the smallest annual income gains ever recorded―just 0.2 percent, down from 2.5 percent a year ago. Consumers favored saving a greater share of their incomes than they have in the past. “Higher savings intentions were reported by four-in-ten consumers, and half of all consumers reported that they intended to reduce their debt during the year ahead,” Curtin added. 

Leading Economic Indicators

The Conference Board Leading Economic Index™ (LEI) for the U.S. declined 0.4 percent in February, following a 0.1 percent increase in January and a 0.1 percent decline in December.

Ken Goldstein, Economist at The Conference Board said:  “The U.S. Leading Economic Index declined in February, but strengths and weaknesses were roughly balanced among its components. Financial market volatility remains strong, and the credit market freeze is relenting very slowly. The LEI suggests the recession will continue in the near term. A return to strong growth will not likely occur until 2010.”

The Conference Board Coincident Economic Index™ (CEI) for the U.S. declined 0.4 percent, following a 0.6 percent decline in January, and a 0.7 percent decline in December. The Conference Board Lagging Economic Index™ declined 0.4 percent in February, following a 0.3 percent decline in January, and a 0.1 percent decline in December. 

Housing 

Existing-Home Sales

Finally there was a small bit of good news from the housing markets. According to the National Association of Realtors® (NAR), single-family home sales rose 4.4 percent to a seasonally adjusted annual rate of 4.23 million in February from a level of 4.05 million in January, but are 3.6 percent below the 4.39 million-unit pace in February 2008. The median existing single-family home price was $164,600 in February, down 15.0 percent from a year ago.

Existing-home sales – including single-family, townhomes, condominiums and co-ops – rose 5.1 percent to a seasonally adjusted annual rate of 4.72 million units in February from a pace of 4.49 million units in January, but are 4.6 percent below February 2008. Seasonal adjustment factors are more volatile in winter months.

Lawrence Yun, NAR chief economist, said first-time buyers accounted for half of all home sales last month, with activity concentrated in lower price ranges. “Because entry level buyers are shopping for bargains, distressed sales accounted for 40 to 45 percent of transactions in February,” he said. “Our analysis shows that distressed homes typically are selling for 20 percent less than the normal market price, and this naturally is drawing down the overall median price.”

Yun said a recovery in the West is much stronger than expected. “Strong sales gains in the West are led by California, where the median listing price is beginning to rise for the first time in three years,” he said.

Total housing inventory at the end of February rose 5.2 percent to 3.80 million existing homes available for sale, which represents a 9.7-month supply at the current sales pace, unchanged from January. In the six months prior to February, the total number of homes for sale had steadily declined from a record level last July.

Regionally, existing-home sales in the Northeast jumped 15.6 percent in February, but are 14.9 percent below February 2008. The median price in the Northeast was $251,200, down 4.8 percent from a year ago.

Existing-home sales in the Midwest increased 1.0 percent in February but are 14.0 percent lower than a year ago. The median price in the Midwest was $131,000, which is 7.8 percent below February 2008.

In the South, existing-home sales rose 6.1 percent in February but are 11.2 percent below February 2008. The median price in the South was $146,700, down 10.0 percent from a year ago.

Existing-home sales in the West increased 2.6 percent in February and remain 30.4 percent higher than a year ago. The median price in the West was $204,600, which is 30.3 percent below February 2008. 

New Residential Sales

Sales of new one-family homes in February 2009 were at a seasonally adjusted rate of 337,000, according to estimates from the U.S. Census Bureau. This rate was 4.7 percent above the January rate, but 41.1 percent below the February 2008 rate.

The median sales price of new houses sold in February was $200,900 with the average price at $251,000. The inventory of new homes represented a supply of 12.2 months at the current sales rate. 

Housing Starts

According to the U.S. Census Bureau, single family housing starts in February were at a seasonally adjusted annual rate of 357,000 or 1.1 percent above the January rate.

All privately owned housing starts were 22.2 percent above the revised January rate, but were 47.3 percent below the revised February 2008 rate. 

Retail Sales

The U.S. Census Bureau reported that advance estimates of U.S. retail and food services sales for February, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, decreased 0.1 percent from the previous month and 8.6 percent below February 2008. Total sales for the December 2008 through February 2009 period were down 9.4 percent from the same period a year ago.

Retail trade sales were down 0.1 percent from January 2009 and 9.8 percent below last year. Gasoline stations sales were down 32.3 percent from February 2008 and motor vehicle and parts dealers sales were down 23.5 percent from last year.

Sales at furniture and home furnishings stores were 0.7 percent ahead of February on an adjusted basis but down 2.6 percent unadjusted. Compared to February 2008, sales at these stores were down 14.8 percent. For the two months, sales at these stores were reported to be off 13.8 percent. This category only trailed gasoline stations (-34.6 percent due primarily to prices), motor vehicle dealers (-26.5 percent) and building material and garden equipment and supplies dealers (-14.0 percent). 

Consumer Prices

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5 percent in February, before seasonal adjustment, according to the Bureau of Labor Statistics of the U.S. Department of Labor. The February level was 0.2 percent higher than in February 2008.

On a seasonally adjusted basis, the CPI-U increased 0.4 percent in February after rising 0.3 percent in January. The energy index rose 3.3 percent in February following a 1.7 percent increase in January as the gasoline index rose 8.3 percent in February after a 6.0 percent increase in January. In contrast, the indexes for fuel oil and natural gas both declined in February. About two-thirds of the all items increase was due to the rise in the gasoline index. Compared to the July 2008 peak, the energy index was 29.2 percent lower and the gasoline index was down 44.0 percent. The food index turned down slightly in February, falling 0.1 percent. 

Employment

Nonfarm payroll employment continued to fall sharply in February (-651,000), and the unemployment rate rose from 7.6 to 8.1 percent, according to the Bureau of Labor Statistics of the U.S. Department of Labor. Payroll employment has declined by 2.6 million in the past 4 months. In February, job losses were large and widespread across nearly all major industry sectors.

The number of unemployed persons increased by 851,000 to 12.5 million in February. Over the past 12 months, the number of unemployed persons has increased by about 5.0 million, and the unemployment rate has risen by 3.3 percentage points. 

Durable Goods Orders and Factory Shipments

According to the U.S. Census Bureau, new orders for manufactured durable goods increased 3.4 percent in February over January. This increase followed six consecutive monthly declines including a 7.3 percent decline in January. Machinery had the largest increase at 13.5 percent.

Shipments of manufactured durable goods declined 0.5 percent. This was the seventh consecutive month that declines were reported.

For the furniture and related products category, the report indicated that shipments in this category were off 18.1 percent and orders were off 16.1 percent. 

Summary

The results for January continued a string of weak results for the industry. We do not expect February results to be much better, if at all, based on what we have heard. So for the historical results, there is not much more to say than what we have said the last few months.

We mentioned in our receivable write up that we had noticed some sliding of ageing. We have also noticed and discussed that many of the ageing buckets include amounts for disputed invoices (whether shortages, quality or whatever). It appears to us that there is potential for substantial dollars by solving these issues on a timely basis. We are concerned that with many companies cutting back at the administra-tive levels, these amounts get put on the back burner and then become much more difficult to resolve.

On the good news side, we heard that High Point pre-market was very well attended. On top of that, we heard that many of the retailers were saying that their inventories were down and they were looking to refurbish the selling floors. Overall, the mood appeared good, though guarded. Most of those we talked with felt that the retailers were not expecting much improvement in the short term and were trying to gear their businesses at current levels of volume. As one exhibitor told me, we feel that we have reached the floor, we just hope there is no basement. 

The hopes that we will see improvement in the overall economy by the third and fourth quarter seem to be pushed out a bit. Yet we had a great week last week in the stock market. Have we returned to a bull market? We doubt we are that lucky yet. But as I heard a commentator say, we won’t know we are in a bull market until we have already had one.

We think most people have had enough of the talk of Wall Street bonuses and all the other rhetoric. If we could hear a bit more positive news, like the market, then maybe consumers will start to open their pocket books again.

We do know that we are still selling lots of furniture. Admittedly, a lot that has been sold recently, especially on the case goods side has been at deep discounts. We hope that most of that is over. Manufacturers and distributors cannot stay in business selling all this stuff at some of the discounts we have heard.

For the retailer, keep in mind that much of the stuff being bought at deep discounts was not selling before. Yes, you can probably sell because it is cheaper, but that means less dollar margin with the same old fixed costs to show, warehouse, advertise and deliver it. We think that also means less profit at retail as well.

Furniture, for the most part is a great value. We need to return to selling it for what it’s worth so that profits can be made. Unlike most of Congress, we think profits are not only a good thing, but are essential if we are going to be around very long. 
 

        (R) Revised 

___________________________

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