Retail outlook 2006
Tough 2005 may set the stage for a winning year
By Clint Engel -- Furniture Today, December 25, 2005
High Point — There's no doubt 2005 was a tough year for many furniture retailers, large and small.
Consider some of the stories that ran in Furniture/Today this year:
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Pat Coslett's Furniture Festival shuts its doors in Evansville, Ind.
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Kronheims closes in Cleveland.
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Levitz Home Furnishings Inc. drops its Seaman's stores, files for Chapter 11 bankruptcy protection, then sells its assets to Prentice Capital Management and Pride Capital, the parent of liquidator Great American Group.
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Rhodes files a reorganization plan, then shuts down.
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Gabberts closes a Dallas outlet store, then says it will exit Texas entirely.
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Homestead House disappears following a long, steady consolidation.
And that's just a sampling.
"I think this year has been one of our tougher years where we didn't have something major like a recession or 9/11 to blame," said Jerry Epperson, industry analyst and a managing director of Richmond, Va.-based investment bankers Mann, Armistead & Epperson.
There were, however, a lot of things getting in the way, such as rising interest rates, a new bankruptcy law that encouraged people and companies to file before the changes took effect, and increases in the minimum payment requirements for credit cards.
Not to mention the havoc caused by hurricanes in Gulf Coast states.
"It's added up to a soft year," Epperson said. "I think the consumer has been, by and large, distracted. And the auto promotions (mainly employee pricing incentives) didn't help either. The U.S. sold 1.8 million autos in July, more than any other month in history."
That said, Epperson believes 2005 has set the stage for a winning 2006. If you look at past so-so years, they've been followed by a strong 12 months, he said. For example, a flat 1985 was followed by a very good 1986. A soft 1996 led to a bounce in 1997.
"I think the same thing is going to happen here," he said. "The economy took a breather, and we're going to come back with stronger growth."
It's likely to get kick-started with the insurance money that's coming to hurricane victims, who have a lot of furniture, not to mention homes, to replace.
Not everyone is sure 2006 will play out this way. Some believe rising energy prices and raw materials costs, including foam for bedding and upholstery, and other challenges will weigh down manufacturers, retailers and consumers into the new year.
For Mulberry, Fla.-based W.S. Badcock, 2005 was like "a tale of two businesses," said Don Marks, president and CEO of the 327-store chain. The first six months were extraordinarily robust, he said, with double-digit sales gains, costs under control and discounting held in check.
Sales held up nicely in the second half, he said, but costs began spiraling upward, thanks largely to higher fuel prices, and hurricanes damaged some stores.
"And this whole business with foam costs is going to stretch us," Marks said, while rising interest rates are making borrowing more expensive.
"I think we have a multi-million-dollar mountain to climb," he said.
To combat these pressures, Marks has imposed new controls on Badcock, such as restricting hiring and overtime. Department heads have submitted revised budgets that look for ways to save money. Fuel prices have eased recently, but Marks doesn't expect to see an improvement in the foam issue until at least the first quarter of 2006.
Wolf Furniture of Bellwood, Pa., isn't complaining about 2005 business, with double-digit sales increases shaping up at its eight main showrooms and clearance center.
"Frankly, I was surprised at the (continuing) strength of business, what with fuel prices and some of the other things going on," said Doug Wolf, president and chief operating officer. "We were waiting for the other shoe to drop," but when it did, the impact was minor and short-lived.
But Wolf is concerned about form shortages and price increases in the wake of Hurricane Katrina. He said it's been relatively easy to remerchandise the upholstery lineup to maintain the middle price points the retailer shoots for, but bedding is a different story. The chain has done particularly well with premium bedding and, in some cases, retail prices on those sets are going up several hundred dollars.
"There's a little trepidation about how that will be received," Wolf said. Since November and December are not big bedding months for his stores, he won't know how consumers will react to price hikes until January.
Epperson doesn't share this concern. "The consumer doesn't buy furniture often enough to really understand the pricing," he said.
And bedding has been the best example of this, according to Epperson. While the furniture sector has been sluggish in recent years, held back particularly by deflation in case goods, bedding prices have gone up steadily over the past five years. "And that hasn't slowed bedding sales down one bit," he said.
In general, retailers are preparing to work harder and more efficiently in 2006, either to turn the tide or continue the positive momentum of 2005.
One thing Wolf saw in 2005 was a drop in daily average business, despite overall double-digit gains. That put enormous pressure on big events and weekend sales. Fortunately, they came through for the retailer.
Wolf is prepared for more of the same in 2006.
"We're far more sensitive and discerning of what our large sales offers are going to be," he said. "Knowing that most of the business gravitates toward these key weekends, we can't miss, so we're using a fine-tooth comb when we plan our big events."
The company will continue layering sales promotions to extend the punch of its big promotions. That means financing offers and one-day specials, for instance, layered over brand or product discounts, with premiums thrown in to boot.
Badcock, meanwhile, is focusing on supply chain management, examining every link to make sure product and information is flowing to and from its dealers quickly and efficiently.
"The industry needs to standardize our backend practices in such a way as to cut costs and improve margins for everybody," Marks said, noting that inventory flow problems are eating into profits that should be coming from the values retailers are finding overseas.
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