Normally, you would expect CEOs in the same industry to agree on the facts even if they have different opinions about how those facts would affect their company. It isn't often that two CEOs have completely different takes on what is happening in the economy.
That's exactly what happened today with the CEOs of furniture retailers RH (RH +6.68%) and Arhaus (ARHS +4.54%). Over the course of 24 hours, one said he expects continued strength and the other implied a recession is imminent. Of course, no one can predict the future. But who is right could go a long way in determining whether the stock market can rebound to all-time highs or if a reckoning is just around the corner.
Image source: Getty Images.
What is it all made of anyway?
Furniture falls into the durable-goods basket of products: those expected to last three years or more. Consumers don't buy them on a whim. That makes it a tell on how good people feel about their economic prospects.
It also provides a good lens into inflation as it relies on a basket of commodities such as petroleum, copper, steel, cotton, and lumber. A year ago, the price of lumber was in the headlines. Then it crashed. It's just about the only input cost that hasn't risen significantly.
For instance, cotton is up 73% from the same time last year. Oil is up 82%. Copper and steel are up 18% and 7%, respectively. It's those numbers that led CEO Gary Freidman of RH to say he has never been more uncertain in his 22 years at the company. Doing the math, that tenure spans two economic contractions, including the Great Recession.
On the other hand, Arhaus CEO John Reed acknowledged the headwinds but said they were expected. He believes a strong start to the year will persist through 2022.
Transportation adds even more inflation
Even after materials are purchased and products are manufactured, they have to be delivered. And the cost of transportation is climbing along with just about everything else. The higher transportation costs, on top of the higher raw material costs, have the potential to seriously crimp profit margins for companies like RH and Arhaus.
But inflation isn't the only problem for the retailers. And for RH, it might not even be the biggest. Sometimes it's impossible to get products even if you are willing to pay a higher price. And one difference between the two companies is their reliance -- or lack thereof -- on China.
Arhaus has only a minor dependence on China. Its annual report references the country only as it relates to tariffs and intellectual property. Reed specifically pointed to the recent COVID-related lockdown of Shanghai as not being impactful.
That stands in sharp contrast to RH. More than 70% of its products are sourced from Asia; a monumental 35% are sourced from China. Freidman even called out the country as a reason product launches have been delayed. In fact, he said RH would be lucky to catch up by the end of the year.
It's all about perspective
It turns out, neither Freidman nor Reed are wrong. They are experiencing different realities at the same time as a result of vastly different supply chains. For investors, the question is what it means for the companies and potentially the broader economy.
The good news is not every company is so reliant on China for its products. Like Arhaus, many have diverse supply chains that span many geographies. The bad news is that RH is less of an exception than the rule. Through decades of globalization, many companies have come to rely on China as a low-cost producer. And problems there will feed through to the U.S. economy.
And even after solving sourcing issues, inflation is rampant across the entire globe. Therefore, few manufacturers will be able to skirt its effects. Both RH and Arhaus were able to pass price increases on to consumers last year. If inflation persists, those customers might not have the money to keep paying higher prices even if they want to.
That said, two companies selling sofas for more than $10,000 might not be the best gauge of the American consumer. It's probably better to wait for first-quarter earnings from blue chips like Walmart, Visa, and Home Depot before jumping to conclusions.
