Natuzzi Follows the Money

Shares of Italian sofa magnate Natuzzi (NYSE: NTZ) fell steadily over most of last week -- both in the days leading up to the firm's Q2 earnings release, and in the days following the release on Wednesday afternoon. So it should come as no surprise that the news was bad.

Despite management's efforts to realign its business to deal with a deteriorating sales environment, things have gotten progressively worse. Unit sales that were down 18.9% for the first half of the year fell 20.6% in Q2 2007 alone. Profits-wise -- or loss-wise for this firm, Natuzzi posted a loss of about $0.11 per share in each of Q2 and Q1.

Where the money isn't
While overall business conditions are "challenging," the real challenge, according to CEO Ernesto Greco, is "particularly in the U.S., where aggressive pricing competition and lower consumer confidence are still dominant factors." No news there. CEOs at rivals La-Z-Boy (NYSE: LZB), Furniture Brands (NYSE: FBN), and Hooker (Nasdaq: HOFT) have been saying much the same for months. But Natuzzi faces its own special difficulties selling sofas in the U.S. Even when it makes a sale, persisting unfavorable euro exchange rates against major currencies -- the U.S. dollar in particular because the euro is up around 9% year over year vs. the dollar -- devalue any revenue dollars Natuzzi brings home and converts into euros. These two factors combined to bring sales (by revenue) down 21.6% in the Americas compared with last year's second quarter, versus the 16.4% decline experienced in Europe.

With recent earnings reports from Home Depot (NYSE: HD) and Lowe's (NYSE: LOW) giving little hope that U.S. consumers are spending more on their homes, and Alan Greenspan going on 60 Minutes Sunday night to tell us that housing prices are going to continue to fall, things aren't looking good for Natuzzi.

Where the money is
Not in the U.S., at least. Fortunately for Natuzzi, it's a big world. If sales stagnate and fall in one hemisphere, the company can always follow the money elsewhere. And last week, the firm announced that it opened three new stores during the quarter -- one in the U.K., one in Finland, and one in Russia. However, keep in mind that at the same time, six were closed in Greece and China.

Sales for the company were certainly weak this quarter in all corners of the world, including Europe. Unfavorable economic conditions are taking a toll on Natuzzi now, but once things get turned around and the housing market begins to recover, the company should be in good condition to revive sales. For now though, expanding its presence in the places where sales trends are less weak is the right move to make. And the expansion in ruble-rich Russia seems a particularly savvy call.