The furniture industry has had a rough couple of months, with weak results just reported at Bassett Furniture (NASDAQ:BSET), a negative preannouncement at Stanley Furniture (NASDAQ:STLY), a warning from Ethan Allen (NYSE:ETH) in August, plant closings at Hooker Furniture (NASDAQ:HOFT), and overall malaise in the industry. So what's on tap when Furniture Brands (NYSE:FBN) reports later in October?
Judging by its own negative preannouncement on Sept. 5, it looks like more of what the competition has been experiencing. Like other domestic furniture companies, Furniture Brands is increasingly sourcing product from overseas -- namely China, the Philippines, Indonesia, and Vietnam. And retail trends continue to be weak; in response, Furniture Brands has increased downtime at an upholstery facility and is focusing on discounts to try and move inventory.
The company still expects sales to increase for its fiscal 2006 third quarter vs. the year-ago period, but it lowered earnings to a range of $0.09 to $0.13 per share, which includes about $0.07 of restructuring and other charges as management looks to reposition the business. That's down from a previous range of $0.18 to $0.22. Additional uncertainty exists around some possible litigation charges and a possible tariff reversal. But overall, results are expected to be anemic.
So, why the weakness in the industry? There are a number of potential explanations, including a cooling housing market due to rising interest rates; rising commodity prices that increase the cost of making furniture (wood, steel, fabric) and also leave less dough in consumer pockets from higher gas prices; and the push toward trendier, straight-line furniture from the likes of Crate & Barrel, Restoration Hardware (NASDAQ:RSTO), and Pottery Barn (owned by Williams-Sonoma (NYSE:WSM)).
The biggest explanation may lie in the manner in which traditional domestic manufacturers and retailers are being forced to source products. The model has quickly shifted to procuring furniture from overseas locations with armies of moderately paid (or worse!) workers. This may have also resulted in the ability of retailers to deal directly with the newer and lower-cost foreign manufacturers, which clearly has caught the entrenched U.S. companies off guard as they perhaps became complacent in controlling the sourcing and distribution of furniture.
We'll see how the industry shakes out; most firms are trying to figure out how to adjust to the new competitive landscape. Discerning the winners from the losers almost always comes down to certain investing basics, such as following the cash flow.
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Stanley and Hooker are Motley Fool Hidden Gems picks.
Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.
