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Furniture/Furnishings Weekly

It was a mixed week in stocks, with most Water Tower Research furniture/furnishings indexes outperforming (with Residential the weak spot following LEG’s dividend cut). Our Home Goods Retailers Index (+6.0%) significantly outperformed the broader market (+0.2% to +1.0%) as well as our Mass Retailers Index (+1.8%) and our Commercial/Contract Furniture Index (+1.6%). Our Residential Manufacturers & Suppliers Index declined 0.9%, driven in part by Leggett & Platt’s steep 23.9% sell-off following its 1Q24 earnings release and investor call. It was the best of times, with strong quarterly results posted by HNI (mostly a margin story) and FLXS (new product introductions driving growth and market share gains in a difficult demand environment). HNI handily beat 1Q24 EPS expectations and delivered impressive margin expansion on weak demand/sales in each of its operating segments. We expect further margin expansion to continue during 2H24. Flexsteel posted a 3QFY24 sales gain of 8.2% on new product introductions, a trend likely to continue given the new April High Point market seating and casegoods introductions and positive dealer reception. It was the worst of times, as Culp announced a restructuring in its mattress division and Leggett & Platt abandoned its “Dividend Aristocrat” perch with an 89% dividend cut ($0.46 to $.05), seeking to jump-start a move to a lower long-term debt ratio from 3.6x adjusted EBITDA to its 2.0x target and restore financial flexibility. During the ongoing bedding and furniture downturn, Culp and Leggett each acknowledged the imperative to ‘right-size’ their businesses. The industry’s structural changes (materials, form factors, imports, sticky cost inflation, and weak housing) make it difficult to forecast if and when a turn will come. Haverty CEO also opined somberly. In his 1Q24 conference call comments, he suggested that “this time, there will be many players who won't survive the recovery.” Weakness will migrate up from the lower end to the high end, echoing concerns about rates, housing, and the consumer. China production/sourcing may be inflecting. Foreign direct investment (FDI) turned negative, with companies looking to source increasingly from Southeast Asia, India, and Mexico. Brookings Institution Senior Fellow (and ex Goldman FX Strategist) Robin Brooks posted data on X showing how FDI into China has turned negative as outflows overtake inflows and reinvested earnings go negative. His chart showed a trend we recently saw at the High Point Furniture Market, where sourcing from India, Southeast Asia, Mexico, and elsewhere was highlighted amid ongoing concerns about the US-China relationship. As earnings season continues, we’ll stay attentive to comments about the hardlines market and consumers. More to come as we have it.