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Furniture/Furnishings Weekly

Following a spate of earnings last week and major retailer earnings ahead, we pause here to reflect on where the furniture and furnishings sectors—residential and commercial/contract—are now and a peek at their likely tracks in the early 2024. Where are we in broad strokes? Residential: Following demand surges fueled by a once-in-a-lifetime focus by consumers on their homes during the pandemic, residential furniture and furnishings demand slumped as the focus shifted to “experiences” from goods. Commercial: New demand (orders) didn’t enjoy the surge (though backlog deliveries fueled reported sales). Today, it is partly captive to the speed and extent of administrative workers’“return-to-office.” For both sectors, costs surged, necessitating price hikes. Management teams shaved costs. In 2023, margins from manufacturers to retailers have improved sharply. Spring-loaded for earnings growth on modest unit demand improvement. Recent reports suggest sales in both sectors are near, if not at, a bottom. Data and charts on page four support this contention. Shipment values slumped modestly, even with price hikes. Declining utilization suggests lower unit production. Yet, Outsized demand growth demand seems unlikely. Residential – existing home sales: Historically, we’ve noted a high correlation and a causative connection between existing home sales and residential demand. Home resales are slow and likely to stay so because, as long as mortgage interest rates and prices remain high, owners have few attractive alternatives, and hence little incentive to sell, and buyers are challenged to buy. Residential – the interest rate yield curve unlikely to move for at least a year. We’re not seeing sustained movement in five- or 10-year Treasuries, more closely tied to mortgage rates. A recession could change that, but a recession would present more challenges to demand. Residential: Consumer confidence remains positive (>100) but has been sluggish and declining. Still-high day-to-day prices and a divisive national election won’t help. Commercial furniture companies have reported some stability and modest upticks in orders as excess inventories cleared. Refurbishing office space for hybrid generated some support. But Kastle Systems data (below) and office occupancy suggest constrained demand for a while. How should investors be positioned? For cyclical issues, investors’ risk capital has been historically rewarded when outlooks are challenged (but closing in on an upturn) and punished when belief, wrongly, suggests the good times will never end. Alternatively, nimble investors may try to time demand turns. The first strategy requires patience and tie up capital; the second is difficult, if not impossible, to execute well.