Investing in Furniture

MarketWatch is reporting, “La-Z-Boy Stock Slumps 10% on Profit Warning”:

“La-Z-Boy Inc. shares fell 10% in late trade Thursday after the furniture maker cut its fiscal second-quarter profit forecast on lower-than-expected sales…

“La-Z-Boy said it now expects to post earnings for the quarter ending Oct. 28 to range from a penny to 4 cents a share, versus its previous view of 11-15 cents a share.

“‘The weaker-than-anticipated retail environment during the summer period leads us to now expect year-over-year sales for the quarter to be essentially flat compared to our original expectation of a mid-single-digit increase,’ President and chief executive Kurt Darrow said in a statement.

“He added that lower-than-expected sales volume is impacting both its wholesale upholstery and casegoods businesses, as well as its company-owned retail stores.

“La-Z-Boy said it expects its core wholesale business to show improving margins, but said the decrease in sales volume is having a ‘significant impact’ on its expected operating results in its retail segment.”

That’s quite a miss. But I am pondering the statement, “La-Z-Boy said it expects its core wholesale business to show improving margins.” Well, I suppose La-Z-Boy could raise prices in this slump to improve margins, but how many units would it sell?

Perhaps the company has something else in mind, such as firing people and moving more operations to Asia. Is that the ticket?

Furniture Liquidation

The Courier-Post of New Jersey is reporting, “Bankrupt Storehouse Liquidating”:

“Storehouse is selling off its sleek sofas, modern rugs, and hip accent pieces and closing its doors, an early casualty of the slowing housing market.

“The Atlanta-based home furnishings chain is liquidating after failing to attract a buyer. Storehouse’s parent company, Rowe Cos., of McLean, Va., put the store on the block in September after filing for protection from creditors under Chapter 11 of the U.S. Bankruptcy Code.

“‘Storehouse didn’t give people the goods fast enough and cheap enough,’ said C. Britt Beemer of America’s Research Group, a nationwide retail analyst. ‘In this market, furniture stores that don’t offer good value might as well be museums’…

“Storehouse’s problems were rooted in infrastructure, rather than design, the company said. In 2005, Rowe installed a colicky new computer system that created frustrating delays in upholstery orders…

[Ah yes, blame it on the computer. I was wondering when that excuse would resurface. — Mish]

“Many customers canceled their orders. Others negotiated deep discounts as compensation, Rowe said in filings with the Securities and Exchange Commission…

“[Beemer] added that furniture sellers have been hard pressed in recent years to compete with Ashley Furniture, which sells affordable, good-quality Asian imports. Ashley is the largest furniture company in the U.S., with stores in Cherry Hill, Millville, Mount Holly, and Turnersville.

“In order to compete, Broyhill is moving its manufacturing operation from North Carolina to China. La-Z-Boy also has streamlined its operation in order to contain costs.

[Streamlined costs, huh? How streamlined? Has everything moved to China that can be moved? — Mish]

“Added to the mix are stalled housing sales and rising interest rates, which make it more difficult for consumers to purchase big-ticket items. Farooq Kathwari, CEO of Ethan Allen, cited the real estate slowdown when he announced last month that quarterly earnings would fall in the $240-million range, instead of the $263.4 million expected by Wall Street analysts.

“Beemer said consumers should expect to see more competitive pricing in furniture as the surviving sellers vie for customers.

[More competitive pricing? Hmm, fancy that. Can we add furniture to the list of things with falling prices? — Mish]

“‘We are going to see more casualties, especially among the companies that are slow to change,’ he said. ‘I expect deflation in the furniture industry will last over the next five years.'”

[Oh my god, was that the dreaded d-word I just saw? For five years?! Say it ain’t so, Joe! — Mish]

A New Data Point

Are new home sales supportive of furniture? The soft-landing theorists believe so. We talked about that Wednesday, Oct. 11, in “Whole Lotta Hopin’ Goin’ On.”

A new data point can be added as of Thursday, Oct. 12, 2006. Please consider, “Centex Reports Preliminary Second-Quarter Results”:

“Housing operating earnings for the fiscal second quarter are expected to approximate $230 million, based on 8,525 home closings. Net sales (orders) for the quarter were 6,828, a decrease of 28% from last year’s second quarter. These results reflect current record levels of home sales contract cancellations, driven in many cases by the inability of buyers to sell their existing homes…

“The company expects option deposit and pre-acquisition walk-away costs to be in the $85-95 million range this quarter. Additionally, land valuation adjustments are expected to approximate $40-45 million, which includes the company’s share of such amounts for a joint venture. The company continues to place emphasis on free cash flow generation and building balance sheet strength in this environment.”

Falling land prices, huh? Hmm. Is that inflation? If it was inflation on the way up (as all the inflationists were screaming), then why isn’t it deflation on the way down? Note that Centex is reporting cancellations due to inability of buyers to sell homes. Hmm, could it be that falling prices put would-be buyers in the red on their existing homes? Is that inflationary?

It’s rather odd, to say the least, that prices of all kinds of things are plunging, such as those for oil, natural gas, copper, dining out, gasoline, private tutors, houses, and now furniture, yet the Fed is more concerned about inflation now than it was when gasoline and home prices (and everything else) were soaring.

Is it prices the Fed is worried about, or has it turned Austrian by worrying about credit expansion, leveraged buyouts, merger mania, the yen carry trade, trillions in derivatives, and rampant stock market speculation?

Of course, the Fed can’t let anyone know what inflation really is; or that the Fed and the government are both to blame; or, for that matter, what is really on its mind, now, can it? Then again, perhaps the Fed is simply as dumb as it sounds. Occam’s Razor would, in fact, suggest the latter.

For the record, no, this is NOT deflation — not yet, anyway — as credit still seems to be expanding. (See “Inflation: What the Heck Is It?” for an explanation.) What we are seeing, however, is massive deflationary forces at work. This puts the Fed in a quandary about what to do with the mess it contributed to itself.

In light of the fact that 810,000 jobs were just found, and those jobs barely delivered a GDP above the stall rate, let’s review “The Red Queen Race.” In that review, it seems like I was mistaken. Forget what I just said about the Fed being in a quandary. Economic Zugzwang sounds more like it.

Mike Shedlock ~ “Mish”
October 16, 2006