With the effects of a weak economy and ongoing corporate downsizing still keeping office vacancies at high levels, investors and analysts haven't been overly positive on the prospects for the domestic producers of office furniture. Based on the latest industry association numbers, 2010 promises to be another tough year with shipments to the U.S. market down by about 3.8%.
But, recent results from some of the key industry players suggests that we may have hit the bottom in terms of corporate furniture demand as a notable improvement in orders appears to be flowing through the bottom line.
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Miller Reports Doubling of Net Income
A better-than-expected pick up in North American sales was cited as a key factor behind the near doubling in net income reported by furniture maker Herman Miller (Nasdaq:MLHR). For the June-August quarter, net income was $16.1 million, or 22 cents a share, compared with $8.4 million, or 14 cents a share a year ago. Sales were up a healthy 17.5%.
Furniture Sector Showing Multiple Signs of Recovery ...
Earlier this year, upbeat results reported by competitors Knoll Inc. (NYSE:KNL) and HNI Corp. (NYSE:HNI) had also signaled that the two-year slump in demand for furniture was starting to turnaround. The evidence of a turnaround in the making was convincing enough for corporate bond rater Standard & Poor's that it recently removed furniture maker Steelcase (NYSE:SCS) from its negative CreditWatch list allowing it to keep it's "BBB-" investment grade rating.
... But Overall Industry Outlook Remains Negative
If Standard & Poor's bond-rating unit had felt the need to be generous in its assessment of the industry, its stock-ranking unit seems content with holding fast to its starkly negative view of the industry. While the stock picker concedes that a gradual pick-up in demand should emerge as companies are forced to replace aging furniture, growing competition, especially from low-cost producers like China, is likely to inflict some serious price pressure on the industry in coming years. In 2000, China's share of furniture imports to the U.S. stood at only 13%; last year, it had risen to 40%. Given that reality, S&P predicts that the long-term price trend for furniture in the U.S. market is flat to down. (Learn more about China in Top 6 Factors That Drive Investment In China.)
The Bottom Line
It's actually remarkable that the U.S. furniture industry has managed to hold its own when there's been steadily increasing Chinese competition over the last decade. However, the combination of a market characterized by weak demand for the foreseeable future, and Chinese import share growth beyond the 50% mark, could just be enough to herald the beginning of the end for U.S. furniture makers. (To learn more, see Bond Rating Agencies: Can You Trust Them?)
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