FREE

Furniture/Furnishings Weekly

Residential furniture stocks had a tough week over concerns about demand, though commercial furniture stocks fared better. The Water Tower Research Commercial/Contract Furniture Index declined 0.5%, the Residential Manufacturers & Suppliers Index fell 3.2%, and Home Goods Retailers declined 5.7%. All three trailed the broader indexes (+0.2 to +0.5%) and the Mass Retailers Index (+1.7%). Attribution is always challenging, but POOL (not an issue in our coverage universe) guidance suggesting that demand for higher-ticket home-related durable goods and home renovations could compare negatively (down by ~15-20%) arguably cast a shadow over residential furniture and home goods retailers. MLKN 4QFY24 posted better-than-expected earnings, but its North America order trends (+5.7% Y/Y, improving each month in the quarter, and +14% versus 3Q) stood out. Over the last month, we have seen HNI note in its analyst call that pre-order activity metrics have been trending up. SCS reported Americas orders up +10%, suggesting that demand for commercial furniture is broadly rebounding. The “spend” on new hybrid work solutions, focused on collaborative work and return-to-work key drivers. CULP 4QFY24 earnings suggest demand for home furnishings remains challenged in the current macro environment as management focuses on restructuring. Challenging comports with the story we have heard from inside the industry (e.g. LZB’s most recent results) and outside (e.g. POOL’s guidance), with weak home sales, economic uncertainty, and the post-pandemic spending ‘hangover’ all contributing to weak demand. Knock-on effects of higher mortgage rates are negatively affecting the economy, creating potential longer-term problems for the home furnishings industry. The WSJ reports (see Figure 1) data illustrating the discrepancy between current mortgage rates and the mortgage rates embedded in the aggregate mortgage debt of American homeowners. The first-order effect is ‘locking’ homeowners into their current home as it would entail a significantly higher monthly mortgage payment to move into a similarly priced home. Secondary effects, including lower demand for home furnishings and renovations, have been noted by many in the home furnishings industry over recent quarters. More concerning are structural changes that this may be inducing, ranging from smaller average home size (as homebuilders seek ‘less expensive’ alternatives in the higher rate environment) and less job-related mobility (as people balk at moving for new jobs), both of which could negatively affect home furnishings demand (lower income growth rates and less space needing to be furnished) even when the more immediate housing weakness (eventually) eases. The upcoming July 4 holiday sales period is the next important data point on the consumer and home furnishings demand.