While demand for home furnishings has definitely slowed since the pandemic highs of 2020 and 2021, some brands and retailers are still experiencing robust sales. That’s according to Haverty’s chief operating officer Steven G. Burdette and CFO Richard B. Hare, who spoke with investment banking company Cowen about the state of the furniture industry.
According to the latest Census retail data, home furnishing stores’ retail sales in July declined 0.3 percent year over year, and slowed for the third consecutive month. On a three-year basis to account for pandemic disruption, retail sales in the second quarter of 2021 increased 18.9 percent, slowing from 25.0 percent in the first quarter of that year, but were above 16.6 percent in the fourth quarter of 2019.
One of the factors fueling that slowdown, according to Burdette and Hare, is price increases retailers and manufacturers have been forced to implement to offset astronomical cargo fees. Haverty’s estimates that average unit retail prices have increased 15-20 percent during the pandemic, with more aggressive retailers upping prices by 30 percent. Burdette and Hare said they don’t anticipate retailers backing off those increases in a major way since many companies absorbed the additional freight fees during 2020.
For mid- and low-end furniture retailers, promotions have become a way to offer shoppers price reductions while helping clear overstocked stores and warehouses that have become crowded as shipping logjams start to ease. But Burdette and Hare caution against overzealous promotions to avoid reverting to historically lower margins. They also think higher-end retailers will be able to maintain merchandise margins over pre-pandemic levels.
Burdette and Hare said the general consumer has been negatively impacted by inflation, but higher-income shoppers have been more insulated. At Haverty’s credit accounts for about a third of the retailer’s business, and management hasn’t seen any deterioration in credit scores, which are typically in the upper-600 to lower-700 range.
Haverty’s reported its supply chain continues to normalize, with lead times improving from domestic vendors, and production becoming more consistent from Asia. The retailer has been able to reduce its backlog, which has now stabilized at 11 weeks, and it expects the backlog and lead times to improve over the coming quarters with the goal of declining to four-to-six weeks by year-end.
The company attributed increased deliveries from the backlog to improved case goods positions. But Haverty’s believes it will likely take into next year to return to pre-pandemic levels. Burdette and Hare said they are encouraged that freight costs are starting to decline (but remain above pre-pandemic levels), as are diesel surcharges.
Haverty’s hasn’t seen a decline in manufacturing quality that some in the industry have experienced due to labor challenges. The company’s manufacturing mix is split 45 percent/55 percent domestic vs. international, with the top three international markets being China, Vietnam, and Mexico. Burdette and Hare noted operations in Mexico are bolstered by Chinese manufacturers opening and moving plants to the country.
Overall, though consumer demand for home furnishings has softened from pandemic highs, Burdette and Hare believe retailers can ride this drop back to something closer to normal. The key for furnishings sellers is maintaining promotional integrity and avoiding the temptation to discount their businesses out of profitability.