hhd 0914 close 09-17-14...ethan allen interiors inc. reported a 2.9% year-on-year increase in...

Please see General Disclaimers on the last page of this report.

Current Environment ............................................................................................ 1

Industry Profile .................................................................................................... 12

Industry Trends ................................................................................................... 13

How the Industry Operates ............................................................................... 24

Key Industry Ratios and Statistics ................................................................... 34

How to Analyze a Household Durables Company ........................................ 36

Glossary ................................................................................................................ 40

Industry References ........................................................................................... 41

Comparative Company Analysis ...................................................................... 42

This issue updates the one dated February 2014.

Industry Surveys Household Durables Efraim Levy, CFA, Consumer Discretionary Sector Equity Analyst

SEPTEMBER 2014

CONTACTS:

INQUIRIES & CLIENT RELATIONS 800.852.1641 clientrelations@ standardandpoors.com

SALES 877.219.1247 [email protected]

MEDIA Michael Privitera 212.438.6679 [email protected]

S&P CAPITAL IQ 55 Water Street New York, NY 10041

Topics Covered by Industry Surveys

Aerospace & Defense

Airlines

Alcoholic Beverages & Tobacco

Apparel & Footwear: Retailers & Brands

Autos & Auto Parts

Banking

Biotechnology

Broadcasting, Cable & Satellite

Chemicals

Communications Equipment

Computers: Commercial Services

Computers: Consumer Services & the Internet

Computers: Hardware

Computers: Software

Electric Utilities

Environmental & Waste Management

Financial Services: Diversified

Foods & Nonalcoholic Beverages

Healthcare: Facilities

Healthcare: Managed Care

Healthcare: Pharmaceuticals

Healthcare: Products & Supplies

Heavy Equipment & Trucks

Homebuilding

Household Durables

Household Nondurables

Industrial Machinery

Insurance: Life & Health

Insurance: Property-Casualty

Investment Services

Lodging & Gaming

Metals: Industrial

Movies & Entertainment

Natural Gas Distribution

Oil & Gas: Equipment & Services

Oil & Gas: Production & Marketing

Paper & Forest Products

Publishing & Advertising

Real Estate Investment Trusts

Restaurants

Retailing: General

Retailing: Specialty

Semiconductors & Equipment

Supermarkets & Drugstores

Telecommunications

Thrifts & Mortgage Finance

Transportation: Commercial

Global Industry Surveys

Airlines: Asia

Autos & Auto Parts: Europe

Banking: Europe

Food Retail: Europe

Foods & Beverages: Europe

Media: Europe

Oil & Gas: Europe

Pharmaceuticals: Europe

Telecommunications: Asia

Telecommunications: Europe

S&P Capital IQ Industry Surveys 55 Water Street, New York, NY 10041

CLIENT SUPPORT: 1-800-523-4534

VISIT THE S&P CAPITAL IQ WEBSITE: www.spcapitaliq.com

S&P CAPITAL IQ INDUSTRY SURVEYS (ISSN 0196-4666) is published weekly. Redistribution or reproduction in whole or in part (including inputting into a computer) is prohibited without written permission. To learn more about Industry Surveys and the S&P Capital IQ product offering, please contact our Product Specialist team at 1-877-219-1247 or visit getmarketscope.com. Executive and Editorial Office: S&P Capital IQ, 55 Water Street, New York, NY 10041. Officers of McGraw Hill Financial: Douglas L. Peterson, President, and CEO; Jack F. Callahan, Jr., Executive Vice President, Chief Financial Officer; John Berisford, Executive Vice President, Human Resources; D. Edward Smyth, Executive Vice President, Corporate Affairs; Charles L. Teschner, Jr., Executive Vice President, Global Strategy; and Kenneth M. Vittor, Executive Vice President and General Counsel. Information has been obtained by S&P Capital IQ INDUSTRY SURVEYS from sources believed to be reliable. However, because of the possibility of human or mechanical error by our sources, INDUSTRY SURVEYS, or others, INDUSTRY SURVEYS does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Copyright © 2014 Standard & Poor's Financial Services LLC, a part of McGraw Hill Financial. All rights reserved. STANDARD & POOR’S, S&P, S&P 500, S&P MIDCAP 400, S&P SMALLCAP 600, and S&P EUROPE 350 are registered trademarks of Standard & Poor’s Financial Services LLC. S&P CAPITAL IQ is a trademark of Standard & Poor’s Financial Services LLC.

INDUSTRY SURVEYS HOUSEHOLD DURABLES / SEPTEMBER 2014 1

CURRENT ENVIRONMENT

Electrolux/General Electric deal

In early September, General Electric (GE) agreed to sell its appliance business to Sweden’s AB Electrolux for $3.3 billion. Strategically, this gives the global appliance maker a stronger position in the US appliance market, where its brands have been relatively smaller players. For GE, the company has long planned to exit businesses, such as its appliance operations, where it is not number one or number two, or likely to be. GE’s appliances’ product portfolio includes refrigerators, freezers, cooking products, dishwashers, washers, dryers, air conditioners, water filtration systems, and water heaters, and has more than 90% of its revenues in North America. In 2013, GE Appliances had sales of $5.7 billion and earnings before interest, taxes and depreciation, and amortization of $390 million, including income from its 48.4% holding of Mexican appliance maker Mabe.

For the industry, we do not see a dramatic shift, especially in the near term. The products will still be sold under the GE name and compete with the likes of Whirlpool, Maytag, Kenmore, and LG brands. Longer-term, the GE operations may benefit from synergies and greater attention from a new corporate parent as it attempts to accelerate its growth and competitiveness in the US. The transaction is expected to close in 2015, subject to regulatory approvals.

WEATHER HURT SALES IN FIRST QUARTER OF 2014

Sales of household durables had a rough start in the first quarter of 2014, primarily due to the effect of unusually bad weather in certain parts of the US. Major players in the industry reported a mixed performance for the first few months of the year.

Ethan Allen Interiors Inc. reported a 2.9% year-on-year increase in consolidated net sales in its fiscal 2014 third quarter (ended March 31). However, the company admitted that the severe winter negatively affected sales, particularly in January and February, with comparable written orders down by 13.4% and 1.7%, respectively. As the weather improved in March, comparable written orders increased to 15.6%. Fiscal 2014 year-to-date sales were $547.8 million, up 0.2% compared with $546.8 million in fiscal 2013.

La-Z-Boy Inc. reported total sales of $353 million in its fiscal 2014 fourth quarter (ended April 26), a 2.1% sales growth compared with $345.8 million in the fourth quarter of 2013. For the full fiscal year 2014, consolidated sales were $1.36 billion, an increase of 6.6%, or $83.4 million, from $1.27 billion in the previous fiscal year. During fiscal 2014, the company experienced the lowest sales for all its segments during the first fiscal quarter than any other quarter in that same fiscal year, largely because of adverse weather conditions.

Sales growth for both Whirlpool and Electrolux (the world’s two largest makers of home appliances) started slowly amid harsh winter weather in the first quarter of 2014, but recovered in March. Whirlpool’s net sales for the three months ended March 31 rose 4.8% to $4.4 billion, compared with $4.2 billion during the same period in 2013. Electrolux’s first quarter sales in the US were down 0.2% to 7.6 billion Swedish krona during January and February of 2014, but recovered in March as net sales edged up 1% to 25.6 billion krona.

S&P Capital IQ (S&P) expects that sales will recover as the weather moderates and demand will continue to strengthen. Data from the Department of Commerce (DOC) shows that spending on major home appliances fell 1.7% in March 2014, compared with March 2013, to a seasonally adjusted annual rate (SAAR) of $38.7 billion. As the US gained more than 200,000 jobs per month from April through July, the Conference Board Consumer Confidence Index (CBCCI) also improved from 81.7 in April to 90.9 in July. These are good indicators that the US economy is starting an upward trajectory—with hiring gains and improved consumer confidence, people are likely to start making improvements to their homes.

2 HOUSEHOLD DURABLES / SEPTEMBER 2014 INDUSTRY SURVEYS

Sales of home furnishings affected by weather early in 2014, but SAAR highest in six years According to the US Census Bureau (CB), sales at furniture and home furnishing stores decreased 0.6% in January, seasonally adjusted month to month, and 2.1% unadjusted year over year. Although bad weather affected the industry’s performance in the first two months of 2014, sales results of major players in the industry (discussed above) show that the US economy is slowly recovering from the sharp contraction in winter. As of June 2014, furniture and home furnishing sales has risen 2.9% from 2013, according to the CB.

On June 27, 2014, Furniture Today published a survey from Smith Leonard, an accounting and consulting firm, stating that furniture factory orders were 13% ahead of April 2013, marking the first monthly double-digit increase in 2014. According to data from the Commerce Department, US retail sales of furniture and home furnishings in March 2014 were $8.37 billion, an increase of 1.0% (the biggest increase since September 2012) from $8.29 billion in March 2013. Retail sales of furniture and home furnishing rose 1.2% in May, and hit a seasonally adjusted figure of $8.55 billion, the highest in six years.

According to Bloomberg’s Ecopulse, an online news provider measuring economic trends and activities, appliance sales could rise this year as Americans replace their aging machines. Whirlpool’s chief executive, Jeff Fetig, said that the company expects industry demand in the US to grow 5%–7% in 2014, while Electrolux has forecast demand growth of 4%. These growth forecasts can be attributed to the recovery in the housing sector, an improved economy, and consumers’ willingness to spend again.

In our view, economic growth was hurt by the termination of the payroll tax holiday in January 2013 (which was in effect in 2011 and 2012). This resulted in lower take-home pay, which had a larger impact on lower- and middle-income wage earners because their discretionary spending is more directly linked to their take-home pay than high-income wage earners. We think some customers traded down to low-end products, causing slight volume declines in the mid-tier furniture segment. Sales of high-end goods that target the more affluent consumers were less affected.

Although the lackluster sales performance in 2013 was somewhat disappointing, given the rebound in the US residential housing market, the number of housing starts increased in the first quarter of 2014. According to the CB and Department of Housing and Urban Development (DHURD), housing starts improved 2.8% in March 2014, to a SAAR of 946,000 units. Home prices have been rising, and foreclosures have been slowing. In June, privately owned housing starts were at a SAAR of 893,000, which is 9.3% below the revised May estimate of 985,000, but 7.5% more than the June 2013 estimate of 938,000. Year to date through June, single-family housing starts were at a rate of 314,100, an increase of 1.2% from the same period in 2013. The June rate for units in buildings with five units or more was 160,100, up 18.3% from the year-ago period.

We think one possible explanation for the gap between the recovery in the housing market and sales of home furnishings is that the latter tends to lag by a couple of quarters. We think that new homeowners typically take some time before they upgrade their furniture. Thus, most furniture manufacturers and retailers are cautiously optimistic about stronger sales in 2014. Some are planning to open or expand stores in an effort to upgrade their stores and offerings to meet the anticipated higher demand.

We also think other factors may hurt sales in 2014. Reduced income from mortgage lending activities in the first quarter contributed to revenue decline. In July 2014, the Federal Reserve announced that it would decrease its monthly purchases of government notes and mortgage-backed securities by $15 billion, to $10 per month beginning in August 2014.

Considering all of these factors, we estimate sales of home furnishings will increase 2% to 3% in 2014. Our forecast is in line with an industry long-term outlook by Furniture Today, a trade publication. According to an article dated December 30, 2013, furniture and bedding sales will reach $109.5 billion by 2018, based on estimates by Easy Analytic Software Inc. (EASI), a provider of demographic forecasts. Based on the $94.9 billion figure for total furniture and bedding sales in 2013, as estimated by Furniture Today, such sales would increase at a compound annual growth rate (CAGR) of 2.9% through 2018.


More appliance sales competition from the likes of electronic firms Despite the bad weather at the beginning of the year, competition in the furniture industry started to rise as almost all of the big furniture companies declared sales increases for the first quarter of 2014. Best Buy’s first quarter comparable store-to-store sales were up 9.1%. Although hhgregg posted weak results for the quarter ended April 2014 due to a 9.9% decline in comparable store sales of 9.9%, its appliance category increased 0.5%. Lowes’ first quarter sales rose 2.4% to $13.4 billion, compared with $13.1 billion in the same quarter in 2013.

On May 21, 2014, Home Depot reported that its profits rose 16% to $1.4 billion in the first quarter of 2014. Sales were up 2.9%, rising to $19.7 billion in the quarter. The company’s operating profit margin was 11.6%, compared with Lowe’s 7.9%. In 2013, Home Depot’s inventory turnover was 4.7X, compared with Lowe’s 3.9X.

For 2014, the International Sleep Products Association (ISPA), a mattress industry trade group, forecast 3.5% dollar growth (down from 6.0% forecast last year) and 2.0% (from 4.0%) unit growth. The association said its forecast was “reasonable” and “very conservative.” The lowered forecast is a sharp contrast to the optimistic view expressed by some bedding producers at the beginning of 2013. According to an article published in Furniture Today in January 2013, a number of bedding producers believed that pent-up demand would lead to robust growth, based on unit shipment data, which had declined 20% from 2005 to 2011. According to a November 2013 article in Furniture Today, the ISPA forecast improved dollar growth in 2014, and even stronger growth in both dollar and unit sales in 2015. Unit sales of mattresses and foundations increased 0.5% in May 2014, compared with the same month in 2013, according to the ISPA.

Since the monthly Consumer Confidence Index (discussed in more detail later in this section) has shown an improvement, unit sales of mattresses also improved. We think that sales of mattresses are driven more by replacement than new home sales. Because most mattresses are often replaced every seven to 15 years as they wear out, we think the replacement cycle has barely begun since unit sales of mattresses peaked in 2006.

Rising e-commerce sales of furniture Retailers are expanding their presence online to spur furniture orders. Online furniture sales represent one of the strongest e-commerce sales categories in the US. The furniture industry’s market share in e-commerce is around 7% out of the US aggregate share of $300 billion. The US Census forecasts that 30% of all furniture sales will be online by 2020. The availability of Internet access is one of the most important factors affecting online furniture sales. According to a survey conducted in January 2014 by Pew Research Center, a nonpartisan research firm, 87% of American adults use the Internet, up from 14%in 1995. Electronic retailing, or “e-tailing,” promises growth opportunities for furniture retailers’ sales by gaining more control of their online marketplace. The increasing online platform for the furniture industry is fueling e-tail growth. According to Furniture Today, Williams-Sonoma Inc. and Wayfair.com both hold the largest share in the online sales furniture industry. In 2013, Wayfair topped $1 billion in sales, reaching a 50% growth on a year-on-year basis. Some furniture retailers integrate applications to smartphones to allow consumers to find products in-store, communicate offers, coupons, loyalty, and payment. While the web’s influence on US retail grows, the furniture industry will lend itself to web-influenced sales more often, most likely with the use of mobile devices to check inventory. According to Forrester Research, Inc., an independent research company, the web will account for or influence 59% of US retail sales by 2018, up from 52% in 2014. This has encouraged webrooming and showrooming. Webrooming is when customers search for products online and then buy their products in-store. Showrooming is the practice of visiting a store or stores to examine a product before buying it online. The driving factor is usually price. Online shopping has become popular because of convenience and the availability of product details, and is picking up momentum, according to The Retailer's Guide to Webrooming study, conducted by Merchant Warehouse.


According to the May 2014 issue of Adweek, an advertising agency, data from a Forrester study shows that webrooming will result in sales of $1.8 trillion by 2017, compared with $1.2 trillion in 2012. Further, according to the 2013 US Holiday Shopping Survey conducted by Accenture, a management consulting, technology services, and outsourcing company, webrooming is popular with nearly two-thirds (65%) of holiday shoppers. The main drivers for webrooming are avoiding shipping fees (47%) and seeing the item before purchasing (46%). Mobility still has a way to go, as most of those who find the best deal online will buy the item on their personal computer (PC) at home (69%) rather than use their mobile device. Furniture is not very prone to showrooming, primarily because of the high shipping cost involved, according to a 2012 survey conducted by Kurt Salmon, a global management consulting firm. Generally, the price of furniture is expensive, and most consumers shop based on their experience with previously purchased household furniture. On the other hand, webrooming offers an opportunity for furniture retailers to make the most of catching the attention of online shoppers and differentiating themselves from existing competitors. New refrigerator efficiency standards go into effect in September 2014 Starting September 2014, residential refrigerators will have to meet tighter standards known as Energy Star. The Environmental Protection Agency (EPA) created this program in 1992, awarding yellow “badges” to qualified products, with the aim of improving efficiency performance across more than 60 product categories. Further, the EPA has directed the Department of Energy (DOE) to assess and lessen the competitive effects of regulation, particularly on smaller, yet significant manufacturers that focus on specific products like refrigerators and air conditioners. These small manufacturers could possibly face challenges raised by Sub-Zero Inc. relative to a larger competitor. Aside from the Energy Star, the DOE obliged manufacturers to meet federal minimums, although Energy Star qualified refrigerators are already 20% more energy efficient than the required efficiency level.

On February 6, 2014, the Association of Home Appliance Manufacturers (AHAM), a trade association of the home appliance industry, has developed a new website, CoolEnergySavings.org, to assist consumers in understanding the new US DOE standards for refrigerators and freezers. The new standards will reduce full-size refrigerator energy consumption by 25% on average, compared with models manufactured 10 years ago. Consumers will know that a product complies with the standard by looking for the yellow EnergyGuide label on the product.

Investing in the US (appliances) According to a study published in May 2014 by The Freedonia Group, Inc., a Cleveland-based industry market research firm, the demand for commercial refrigeration equipment in the US is expected to increase an average 3.1% per year through 2018 to $10.7 billion. With strong demand in appliances in the US, Electrolux announced in May 2014 its $30 million investment in Anderson, SC manufacturing facility, which produces top-mount refrigerators and under-counter models. Electrolux is also planning to buy General Electric’s appliance operations (see page 1). Earlier, Whirlpool announced its plan to invest $40 million by doubling its Greenville, Ohio small appliance manufacturing operations.

Herman Miller, manufacturer of classic midcentury design furniture, announced on July 17, 2014 its acquisition of Design Within Reach—the retailer known for its European designs—for $154 million in cash. In March 2014, Delta Furniture Co., a manufacturer of upholstered living room furniture, announced its plan to invest $520,000 to expand its Mississippi facility. These acquisitions and expansions will create more jobs and contribute to economic growth in the US.

Furniture imports US furniture imports rose 8% in 2013, led by case goods, with vast of shipments coming from China, Vietnam, and emerging players like India and Indonesia, according to Furniture Today’s report on April 24, 2014. According to Furniture Today, Vietnam is expected to be one of the preferred suppliers of Councill Company’s Thomas and Gray division (manufacturer of handmade wood and upholstered furnishings for residential, hospitality, and commercial interiors), due to a variety of chairs and metal accent pieces offered, aside from affordable prices. Vietnam’s shipment of bedroom furniture saw an increase of 7%, partly attributed to the fact that duties are not imposed.


In 2013, Legget and Platt, Inc., a diversified manufacturer of a wide range of products found in most homes, along with several US manufacturers in various industries, originally petitioned an investigation and alleged that overseas producers are shipping their goods to the US at unfair prices. To protect the domestic market, the DOC and International Trade Commission published its final order on April 23, 2014, extending the antidumping duties on uncovered innerspring units through February 2019 for China, and December 2018 for South Africa and Vietnam. This will mean that these overseas producers will have to be collected cash deposits, although the importers will pay the duties.

Akio Nitori, a Japanese furniture business tycoon, opened two stores in Southern California in 2014, the first phase of a plan to open 100 showrooms in the US in five years. This optimistic move targets the middle consumer base.

Improving sales of appliances We estimate that US appliance sales increased at a mid- to high-single-digit rate in 2013. According to industrywide sales data from the AHAM, unit shipments for all major appliances in 2013 rose 5.0% to 63.9 million units, from 60.8 million units. Meanwhile, unit shipments of washers, dryers, dishwashers, ranges and ovens, refrigerators, and freezers (collectively referred to as the AHAM 6) rose 9.4% to 39.2 million units. Data published in April 2014 by (AHAM) showed that shipments of home appliances in the US rose 8.9% in March, after declining in the first two months.

Whirlpool Corp., a leading appliance manufacturer, saw its sales increase 3.4% to $18.8 billion in 2013, versus $18.1 billion in 2012. For the fourth quarter of 2013, sales were up a more robust 6.2%, year over year. Sales in Latin America increased 3.8% compared with the same quarter in 2012, while sales in Asia

declined 12.8% for the same period last year. The Europe, Middle East, and Africa (EMEA) region reported growth of 1.2%, and North America sales increased 8.7%. In contrast, AB Electrolux reported a sales decline of 0.8% in 2013. In the fourth quarter of 2013, company sales decreased 1% from the same period in 2012, though the 3.6% organic growth with North America and Asia-Pacific (APAC) was offset by currency adjustments. These results were driven by the strong organic sales growth of 7.6% in North America, where a sales increase of 5.1% was reported in that quarter. We think that Whirlpool is gaining market share, given its better performance in 2013, and that Electrolux is feeling the impact

of weakness in Europe. Electrolux posted 1.1% organic sales growth in the EMEA region in the fourth quarter, an increase of 0.7% from the same quarter in 2012.

THE US ECONOMY: KEY TO HOUSEHOLD DURABLES INDUSTRY GROWTH

In our view, the sluggish sales growth seen in 2013 in the household durables industry reflects modest consumer spending for big-ticket items despite the gradual strengthening occurring in both the US economy

TABLE B04: US SHIPMENTS OF MAJOR HOUSEHOLD APPLIANCES†

US SHIPMENTS OF MAJOR HOUSEHOLD APPLIANCES†(In thousands of units, excluding exports)

- - - - - - - - - - - - - - YEAR ENDED DEC. 31 - - - - - - - - - - - - - % CHG.

2000 2005 2010 2012 2013 2012- 13

Kitchen appliances, total 43,456 51,744 38,975 38,987 41,028 5.2Cooking, total 20,846 23,809 16,574 16,521 16,767 1.5

Electric 5,026 6,194 4,449 4,332 4,794 10.7Gas 3,176 3,755 2,791 2,610 2,880 10.3Microw ave 12,644 13,860 9,334 9,578 9,093 (5.1)

Food w aste disposers 5,485 7,040 5,320 6,066 6,680 10.1Automatic dishw ashers 5,827 7,424 5,711 5,702 6,354 11.4Trash compactors 118 122 44 35 38 9.1Freezers 1,963 2,214 1,957 1,981 1,839 (7.2)Refrigerators 9,217 11,135 9,369 8,682 9,349 7.7

Laundry appliances, total 14,070 17,383 14,556 13,121 14,679 11.9Automatic w ashers 7,495 9,225 8,000 7,309 8,172 11.8Dryers 6,575 8,158 6,551 5,812 6,507 12.0

Home comfort, total 7,471 9,989 7,970 8,716 8,154 (6.4)Room air conditioners 6,496 8,032 6,418 7,548 6,769 (10.3)Dehumidif iers 975 1,957 1,552 1,168 1,385 18.6

Total appliances 64,997 79,116 61,501 60,824 63,861 5.0†Includes shipments for the US market, w hether imported or domestically produced. Note: Totals may not add due to rounding and overlapping categories.Source: Association of Home Appliance Manufacturers.


and the housing market. As the economy continues to trend upward and the housing recovery picks up momentum, we project slightly stronger sales growth in 2014.

GDP growth uneven The pace of growth in the US economy fluctuated widely quarter to quarter in 2013. The pattern continued in 2014 with real gross domestic product (GDP) dropping 2.1% in the first quarter, and growing to 4.0% in the second quarter. As of July 2014, Standard & Poor’s Economics (which operates separately from S&P Capital IQ) was forecasting a much smaller annualized 2.0% growth in real GDP for 2014 (a downward revision from our 2.3% forecast in June) and 3.1% growth for 2015.

Unemployment rate has declined, and labor market has strengthened Unemployment levels, which reached a historic peak of 10.1% in October 2009, averaged 9.6% in 2010, 8.9% in 2011, and 8.1% in 2012. As of December 2013, the unemployment rate was 6.7%, while the average unemployment rate for 2013 was 7.4%. In July 2014, the rate had increased to 6.2% from 6.1% in June. As of July 2014, Standard & Poor’s Economics was forecasting an unemployment rate of 6.5% for 2014 and 6.0% for 2015.

The unemployment rate has fallen by about 1.1% from July 2013, and the number of jobs created has shown some slight improvement. The nonfarm payrolls report showed that the US economy added 209,000 jobs in July 2014. Although this job creation is lower than the previous three months, six straight months of solid 200,000-plus job growth is a sign of a strengthening economy. While the private sector added jobs, the government sector showed little change.

Changes in the unemployment rate are usually a good indicator for assessing the jobs market and we think that a drop in the labor participation rate has skewed this metric recently.

Consumer spending review According to the US Department of Commerce’s Bureau of Economic Analysis (BEA), a federal agency that collects economic data, real personal consumption expenditures (PCE) increased 3.3% in the fourth quarter

of 2013. In the first and second quarters of 2014, the rate increased to 3.0% and 2.5%, respectively. On August 1, 2014, the BEA released a revised estimate of 0.4% increase or $51.7 billion in PCE for June. As of July 2014, Standard & Poor’s Economics was forecasting that consumer spending would rise 2.7% in 2014 and 2.8% in 2015.

Furniture and home furnishing sales in December 2013 were up 4.5% from the prior-year period and down from a 7.4% increase in November, according to CoreLogic, a provider of consumer, financial, and property information. It is important to remember that consumer spending dominates the US

economy: it typically accounts for about two-thirds of GDP. However, the percentage has been declining in recent years, from a high of 71% (in 2007) to 64% (in both 2009 and 2010); in 2012, it was 64.7%. S&P estimates that consumer spending will account for 63% of GDP in 2014.

Housing recovery The housing sector has benefited from another year of healing. The inventory of unsold homes on the market has reached near-normal levels, and foreclosures, while still high, continue to ease. Huge rental demand has driven up rental costs, another factor that may motivate potential buyers to sign on the dotted line.

TABLE B05: CONSUMER SPENDING FOR FURNITURE AND APPLIANCES

CONSUMER SPENDING FOR FURNITURE AND APPLIANCES(In millions of dollars)

- - - - - - HOUSEHOLD APPLIANCES - - - - - -

SMALL TOTAL

ELECTRIC MAJOR FURNITURE &

APPLIANCES APPLIANCES TOTAL FURNITURE APPLIANCES

2013 6,033 39,423 45,456 95,343 140,7992012 5,773 38,138 43,911 93,993 137,9042011 5,500 37,436 42,936 88,811 131,7472010 5,209 36,529 41,738 85,866 127,6042009 5,766 33,992 39,758 77,683 117,4412008 5,937 37,282 43,218 87,013 130,2322007 5,899 38,699 44,598 94,170 138,7682006 5,636 38,966 44,601 94,205 138,8062005 5,295 38,006 43,301 91,341 134,6422004 4,923 35,894 40,818 86,842 127,6592003 4,581 33,791 38,372 81,551 119,923

Source: US Bureau of Economic Analysis.


According to the National Association of Realtors (NAR), a trade organization, total home sales in 2013 reached 5.09 million, which is 9.1% higher than 2012, the highest since 2006 (when sales reached an unsustainable high 6.48 million at the close of the housing boom). Sales of existing homes (a category that includes single-family, townhomes, condominiums, and co-ops) totaled 4.87 million units in 2013, up 1.0% from a downward revised 4.82 million in November 2013 (0.6% below the 4.9 million-unit level in December 2012). While this total remains well above the trough of 3.3 million (SAAR) in July 2010, it is still lower than the tax credit-driven cycle high of 5.38 million in November 2009.

The national median price for all housing types was $197,100 in 2013, up 11.5% year over year. Distressed homes (foreclosures and short sales) and shrinking shares of distressed sales accounted for the increase in annual home prices.

The decline in the rate of foreclosures also corroborates the housing market recovery. According to CoreLogic, in March 2014, completed foreclosures dropped 10% to 48,000, from 53,000 in March 2013, and were up 5.9% from 45,000 in February 2014. In March 2014, the nation’s foreclosure inventory (i.e., the share of all mortgaged homes in any stage of the foreclosure process) represented 1.8% of all mortgaged homes, down from 2.8% in March 2013.

The NAR reported that 14% of the 4.59 million existing home sales (SAAR) for March 2014 were distressed sales (i.e., foreclosures and short sales), which typically result in prices that are about 15% less than the prices paid for comparable homes.

The NAR report on existing home sales indicated that first-time buyers accounted for 30% of homes purchased in March 2014, unchanged from March 2013, but

up from 28% in February 2014. Investors accounted for 17% of total transactions in March, down from 21% in February 2014 and 19% in March 2013. An interesting point is that 33% of all existing home sales transactions in November 2013 were all-cash deals.

Although sales of new single-family homes fell 7% in December to a seasonally adjusted rate of 414,000, 2013 saw the highest sales level since 2008, according to data from the Commerce Department. Furthermore, in a report released in April 2014 by the CB and the DHUD, new single-family home sales totaled 384,000 units in March 2014, a 13.3% drop from March 2013. The median sales price of new homes sold in March was $290,000 (the highest rate ever), while the supply of new single-family homes for sale (seasonally adjusted) at the end of March was $193,000.

Homebuilding activity slowed in December 2013 at a seasonally adjusted rate of 999,000, which is 9.8% lower than November’s leap of 1.2 million (the fastest in five years). However, 2013 ended with the best result since the housing bubble burst—923,000 homes and apartments were started, up 18.3% from 2012 and the strongest since 2007. In June 2014, the number of housing units builders started working on fell 9.3% to an annual rate of 893,000, while the number of housing permits issued by local governments fell around 4.2%. For single-family homes, we expect about a 25% gain for 2014. Multifamily starts jumped about 30% in 2013 over 2012, and we expect to see a 25% gain in 2014.

Chart H01: HOUSING ACTIVITY & OUTLAYS FOR HOME PRODUCTS

0

15

30

45

60

75

90

105

120

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2000 2002 2004 2006 2008 2010 2012 *2014

Sales of existing homes (left scale)

Housing starts (left scale)

PCE– Furniture (right scale)

PCE– Major appliances (right scale)

PCE–Personal consumption expenditures. * Through May.Source: US Department of Commerce.

(Thousands of units) (Billions of 2000 dollars)

HOUSING ACTIVITY AFFECTS OUTLAYS FOR HOME PRODUCTS


Even if people are not buying homes at pre-recession rates, they still need a place to live, and so they rent instead. Renting increases demand for multifamily properties because most renters live in apartments. In our view, demand for rentals will not weaken any time soon. Furthermore, lost net worth and income have reduced the number of prospective homeowners. Finally, with credit conditions likely to be tight for some time, the homeownership rate, which slid to an 18-year low of 65.2% in the fourth quarter of 2013, slipped to 64.8% in the first quarter of 2014, and climbed to 64.7% in the second quarter.

US HOUSING MARKET DRIVES FURNITURE DEMAND

The home furnishings industry is fueled in part by the housing market, which generally responds to interest rates, consumer confidence, and employment trends. Demand for furniture will gain support from a rise in both disposable income and consumer spending. The furniture market is likely to benefit more from the higher growth in multifamily housing units than the modest growth in single-family units.

Housing starts recovered in 2012 and the recovery continued in 2013. As of July 2014, Standard &Poor’s Economics was projecting an increase in 2014 of 1.1 million units. While the increases are good news, we note that these totals remain significantly below those of recent years: 1.34 million in 2007, 1.81 million in 2006, and 2.07 million in 2005. However, amid a recovering economy and improving credit conditions, the housing market is expected to rebound, thus fueling the demand for furniture. According to the National Association of Home Builders (NAHB), a trade group, the average new homebuyer spends $3,000 more on furnishings than a household that does not move.

APPLIANCE SALES: MODEST GROWTH IN THE US AND EUROPEAN MARKETS

According to data from the AHAM, unit shipments for all major appliances totaled 63.9 million in 2013, up 5.0% from the previous year. Most major categories experienced year-over-year growth in 2013, including all cooking products (up 1.5%), home laundry (up 11.9%), and refrigerators 6.5 cubic feet and over (up 7.7%).

Whirlpool Corp., the world’s largest appliance maker, said its sales in North America increased 9.0%, year over year, in the fourth quarter of 2013. In 2012, sales in North America fell 2.9%, following a decline of 2.1% in 2011. Based on the economic outlook, the company said it expected its US unit shipments to increase 5%–7% for 2014.

Demand for household appliances in Europe increased in 2013. In the fourth quarter of 2013, Whirlpool experienced a year-over-year 6.8% increase in sales. The company believed that Europe remains one of the most challenging markets and forecast that unit shipments in Europe will be flat up to 2% in 2014. Most major European appliance manufacturers have been moving to countries in Eastern Europe with low labor costs. Major appliance manufacturers have high penetration in Western Europe.

Europe appliance sales show slow growth The weak economic growth in Europe has stalled sales growth in this region. Despite Europe coming out of its 24-month recession in the fourth quarter of 2013, the region continues to be a challenge for the household durables industry.

AB Electrolux’s sales in Europe, the Middle East, and Africa (EMEA) reported organic sales growth of 4.5% in 2013, due to increased sales volumes and mixed improvements despite the challenging conditions in Southern Europe and exchange rate losses. The company expects European demand for appliances to be slightly positive in 2014. In the first quarter of 2014, demand in Europe recovered and the market was up 3%.

In Europe, Whirlpool is performing better than Electrolux. According to Whirlpool, European economies are stabilizing, but still weak. In October 2013, the company, seeing a rise in consumer sentiment in the region, revised its outlook for the region from negative to flat. In the fourth quarter of 2013, Whirlpool’s sales in the EMEA region increased 1% year over year. In the first quarter of 2014, sales increased approximately 4%, with net sales of $720 million compared with $668 million for the same period in 2013.


The Home Improvement Research Institute (HIRI), an organization of retailers, manufacturers, and allied organizations within the home improvement industry, projected in March 2014 that housing starts would increase 22% in 2014. Further, HIRI expects that consumer spending will return to a trend growth rate of about 3% in 2015 and 2016, based on good employment growth, rising confidence, and improved household financial position.

Growth in emerging markets likely to continue US appliance manufacturers are gaining sales traction in many of the key developing markets overseas. Among the emerging markets, major growth will come from Latin America (particularly Brazil), followed by China and India, both of which have billions of residents, many of whom are entering the middle class as those nations’ economies grow. According to a study released in November 2010 by the Boston Consulting Group, a global management consulting firm, the number of China’s middle-income and affluent consumers will likely triple in the next 10 years, with most of the growth coming from smaller cities. The firm predicts that there will be 270 million more consumers earning more than 60,000 yuan ($9,000) by 2020, raising the middle- and upper-class tally to 415 million from the current 148 million. However, US firms will have to contend with the strong presence of domestic players within these countries.

Latin America experienced strong appliance sales growth through most of 2013. In the fourth quarter of 2013, Whirlpool, the market leader in this region, posted an 8% sales growth. Whirlpool expects total unit shipments to be flat in 2014.

HOME IMPROVEMENT MARKET ON THE UPTREND

The kitchen has always been the heart of the home, which is why many homeowners who embark on home makeovers and remodeling target the kitchen, and this often includes upgrading appliances. Today’s kitchens are used not only for cooking, but also for entertaining and other purposes. On June 3, 2014, Consumer Reports, a nonprofit organization, surveyed 1,000 Americans and asked about the activities they do in the kitchen beyond meal preparation. Nearly 50% entertain their guests in the kitchen, 58% go online while downloading recipes and browsing through social media channels, and 61% use the space to do homework or paperwork.

According to the Wall Street Journal, US homeowners spent $130 billion on remodeling projects in 2013. In our opinion, demand for US residential remodeling will continue to rebound. Given the rise in average home prices, we think homeowners are feeling better about their homes and are more willing to remodel to increase their values. For instance, Home Depot Inc. reported a 2.9% gain in sales in the first quarter of fiscal 2014 (ending May 31) over the same period in 2013. The company stated that the growth in sales was primarily due to the improvement in the housing market.

Assuming a recovery in the housing market, along with a healthier employment situation, HIRI forecasts growth of 6.8% and 7.0% in 2014 and 2015, respectively, and then a slight deceleration in growth over the following two years. Our forecast for home improvement retailer Home Depot Inc. (which is covered in the Retailing: Specialty Survey) sees its sales likely increasing 4.8% in fiscal 2015 (ending January 2015) and 4.4% in fiscal 2016, following a 5.4% increase in fiscal 2014.

In April 2014, the HIRI’s most recent study shows that 74.5% of homeowners are planning one or more projects around the home. The average number of planned projects for the second quarter is 4.6, which is unchanged from a year ago. According to HIRI, 41% of homeowners are planning work on the lawn, 24% on the deck, patio or porch, 21% on permanent plantings or shrubs, 19% on trees, and 19% on kitchen improvements. The IHS Global Insight, a global information company, forecast that home improvement products will rise 6.2% in 2014 (3.2% after adjustment for inflation) due to higher material prices, particularly for dimensional lumber and plywood.


RISE IN OPERATING COSTS

Many of the key input costs for household durables companies have risen substantially. Commodities such as cotton, steel, and lumber surged through 2011, some even doubling in cost. As published by the US government on July 22, 2014, the inflation rate was at 21% through the 12-months ended in June 2014.

Mixed raw material costs Although raw material prices did not change much in the first quarter of 2014, individual prices took different paths. For instance, according to the World Bank, cotton prices were up 8% in that quarter and 5% higher than the same period in 2013. Meanwhile, steel prices are beginning to pick up. According to the Global Composite Carbon Steel Price Index, steel prices were almost unchanged at $710 per ton in November 2013. However, this was higher than the $679 per ton level seen in July 2013. Further, steel prices declined in 2013, with an average of $791 for the year. Plastic prices increased, according to the US Producer Price Index (PPI). In December 2013, plastic manufacturing was at a level of $185.5. This increased to $185.7, $186.0, and $186.5 in the first quarter of 2014. In December 2013, the prices for low-density polyethylene (LDPE) rose 24.1% to $1,730 per metric ton from December 2012.

Facing mixed materials cost pressures, Whirlpool, which uses large amounts of steel, oil, plastic resins, and base metals (such as aluminum, copper, zinc, and nickel) to produce its products, managed to record a significant improvement in its gross margin in the last quarter of 2013, increasing to 17.9% versus 16.9% in the prior-year period. For the first quarter of 2014, the company’s gross margin increased to 17.3% from 17.1% for the same period in 2013. Whirlpool attributes the margin expansion to the various cost reduction measures and initiatives it has undertaken, but still views materials and oil-related costs as a potential headwind in 2014.

POLARIZED OUTLOOK FOR HOUSEHOLD DURABLE COMPANIES

We expect the US economy, though still somewhat uncertain, to show modest improvement as the job and housing markets continue to improve, with slightly better consumer confidence and consumer spending. That said, there are many consumers still suffering from the loss of wealth following the recession, as well as from continued worries about employment and job security.

Private demand has started to strengthen, but we expect only sluggish growth through 2014. With the job market remaining soft and worries that dysfunction in the US government will lead to something more severe, consumer and business spending will remain subdued. We expect real GDP to rise 2.0% in 2014 (revised down from our 2.3% forecast in June, given the first quarter drag) and 3.1% in 2015. The unemployment situation will remain soft, with the unemployment rate expected to be 6.5% for 2014 and 6.0% for 2015.

With only modest improvements expected in the unemployment rate, we think that a significant portion of the US population will remain concerned with job security and, therefore, still not comfortable enough to make large discretionary purchases. Meanwhile, the segment of the population that is recovering will likely continue to do so, and feel increasingly comfortable making large purchases. Finally, effective and efficient execution on the part of the household durables companies—especially in the areas of geographic expansion, operating efficiency, and marketing—will likely remain crucial for both near- and long-term success.

We think certain household durables companies are performing significantly better than their peers are, due to the improving economic condition of their customers. Meanwhile, other companies are still suffering, or seeing a much weaker recovery, because their customers are still deeply concerned about their job prospects and other economic factors. Finally, some household durables companies have made significant efforts to cut appropriate costs and adapt their products and marketing to meet current demand. Others that survived the recession seem to be unprepared to compete successfully in the current environment.

Given these factors, we think potential customers of these household durables companies are increasingly falling into two polarized camps. First are those customers that have rebounded from the recession and have resumed spending on discretionary items like furniture and appliances. Second are the people who are still


concerned about their current situation and are not comfortable spending on large-ticket discretionary items. This implies that there is demand for high-end products from the top-end consumers, demand for low-end products from consumers looking to trade down to cheaper alternatives, but not much demand for middle-range products, which are indeed experiencing an overall decline.

Home furnishings sub-industry outlook As of mid-July 2014, we had a neutral fundamental outlook on the home furnishings sub-industry. We expect industry sales to rise at a mid-single-digit rate in 2014, driven by the rebound in the US residential housing market. As of July 2014, Standard & Poor’s Economics was estimating US housing starts for 2014 at 1.1 million, up 18% from the 930,000 projected for 2013. However, the pace of new housing construction has slowed recently due to higher mortgage rates.

S&P expects housing renovation activity to pick up, given the rise in home values. Consumer confidence has been trending up for the past couple years. The Consumer Confidence Index, released monthly by the Conference Board, rose in July 2014 to 90.9, from 77.5 in December 2013. The labor market has been improving, with 209,000 jobs added in July.

However, we think not all segments of the home furnishings market will experience similar growth. While the overall economy is growing, some consumers were hurt by higher payroll taxes in 2013 and are paying down their debt. We project slight volume declines in the mid-tier segment, as some customers trade down. More affluent consumers are less affected by higher payroll taxes because they derive more of their wealth from investments. Thus, we expect the high-end of the home furnishings market to continue to outperform.

We think American home furnishings companies have become more competitive by improving their manufacturing facilities. These companies are upgrading existing stores and factories instead of building new ones. After industry consolidation of a number of furniture retailers in 2009 and 2010 brought on by bankruptcy filings, we look for the larger publicly traded home furniture companies to gain market share, while widening their operating margins from improved inventory controls.

Household appliances sub-industry outlook As of late July 2014, S&P’s fundamental outlook for the household appliances sub-industry was neutral. We expect worldwide unit demand for major appliances to rise at a low to mid-single-digit rate in 2014. The household appliances sub-industry benefits from increasing housing starts and we project a 6% growth in the US, driven by a rebound in the residential housing market. Standard &Poor’s Economics was estimating US housing starts at 1.06 million for 2014, and 1.37 million for 2015, up 18% from the 930,000 projected for 2013. We also see increased demand coming from housing renovation activity, given the rise in home prices. However, our view is tempered by uncertainty about future economic policies. The US unemployment rate has been declining—job gains and employment growth are indicative of economic recovery, albeit at a slow pace.

The household appliances industry has been consolidating, resulting in fewer, but more global competitors. We think competition will increase, as some of these companies expand into new geographical regions. In particular, Samsung and LG Electronics have made significant inroads into the US market, in part through aggressive pricing on certain products. As a result, large retailers such as Home Depot and Lowe’s have expanded their number of appliance lines. With increased competition from less expensive imports, it will be more difficult for domestic appliance manufacturers to raise their prices. We think this factor, compounded by our forecast of slightly higher commodity prices, will hurt operating margins in 2014.


INDUSTRY PROFILE

Industries that rely on consumer spending

The industry structures and competitive environments of the appliance and home furnishings are markedly different, but they have similar customer bases and exposure to consumer discretionary spending. Appliance manufacturing is highly concentrated, while furniture making is fragmented. Their production modes also differ: appliance manufacturing tends to be more automated and less labor-intensive than furniture making. US-based appliance makers also have more diversified, global revenue bases compared with US furniture companies, which are mostly concentrated in the domestic market.

Traditional retail outlets (full-service department stores and multi-brand furniture and appliance stores) continue to ring up the most sales for both industries. However, nontraditional distribution channels, including privately owned furniture stores, home improvement chains, and warehouse clubs, are gaining market share. Still somewhat weak economies in developed market countries have led to further consolidation in retail stores that market home appliances and home furnishing goods, while emerging market countries are still expanding retail outlets.

HOUSEHOLD FURNISHINGS

Most furniture manufacturers and retailers have streamlined their operations by cutting costs and moving some facilities to lower-cost countries, as most of them have not returned to pre-recession levels. We think they are well positioned for the slow gradual improvement we have seen in 2013 and expect in the future.

Across the major categories of bedding, upholstery, and case goods, we see furniture companies are trying to innovate with new product designs that offer consumers quality and good value at competitive prices.

According to Furniture Today, a weekly print and online publication, Top 100 US Furniture stores’ total furniture, bedding, and accessories sales in 2013 increased 7.8%, with a combined revenue growth of $34.1 billion, up from $31.7 billion in 2012. Although this figure is not as remarkable as the 9.9% gain in 2012, it has contributed to capturing more market share. The largest sales categories in 2013 were stationary sofas and sofa sleepers, which accounted for 15.2% of total retail sales, followed by bedding at 14.7%, and master bedroom furniture at 10.4%.

The industry is projected to grow 15.4% in total sales by 2018, according to market research dated December 31, 2012, from Furniture Today and Easy Analytic Software Inc., a provider of demographic forecasts. We witnessed a gradual strengthening of demand in 2013 as the economy improved modestly.

TABLE B02: LEADING US FURNITURE MANUFACTURERS

LEADING US FURNITURE MANUFACTURERS(Ranked by 2013 furniture revenues)

- - - - - - REVENUES (MIL. $) - - - - - -

COMPANY 2012 2013 % CHG.

1. Ashley 3,515.8 3,658.3 4.12. La-Z-Boy 1,030.0 1,061.7 3.13. Furniture Brands Int'l. 905.1 650.0 (28.2)4. Klaussner 524.3 524.3 0.05. Dorel 479.6 476.4 (0.7)

6. Sauder Woodw orking 458.9 475.0 3.57. Flexsteel 340.9 382.0 12.18. Lacquer Craft 380.0 369.7 (2.7)9. Man Wah Holdings 329.1 365.7 11.1

10. Ethan Allen 338.4 342.0 1.1

11. Bernhardt 280.0 313.5 12.012. Home Meridian Int'l. 267.3 275.8 3.213. L&P Consumer Products 261.7 266.4 1.814. Standard Furniture 180.3 220.3 22.215. Hooker 209.6 219.2 4.6

16. Best Home Furnishings 203.0 218.6 7.717. Bassett 180.2 210.9 17.018. Sherrill Furniture 181.4 208.6 15.019. Natuzzi 206.8 201.5 (2.6)20. Franklin 184.3 171.3 (7.1)

Source: Furniture Today.


APPLIANCES

Unit shipments of major kitchen and other household appliances in North America totaled 63.9 million in 2013, up 5.0% from 60.8 million in 2012, according to the Association of Home Appliance Manufacturers (AHAM), an industry trade group. S&P Capital IQ (S&P) thinks that shipments in 2013 increased from 2012 due to the continued recovery in the housing market. In 2014, we expect North American appliance shipments to rise 6%, given the ongoing economic recovery.

As of July 2014, Standard & Poor’s Economics (which operates separately from S&P Capital IQ) was forecasting that US real GDP would increase 2.0% in 2014 and 3.1% in 2015. The consumer price index (CPI) is another important benchmark for the appliance industry. S&P’s economists were estimating a 1.9% increase in the CPI in 2014 and 1.7% in 2015, versus increases of 1.5% in 2013 and 2.1% in 2012.

In the US, two companies—Ashley and La-Z-Boy—dominate the core furniture market, which comprises of dining, living, and bedroom furniture.

Historically, department stores (such as Sears, Roebuck) and family-owned stores dominated the retail distribution of appliances. However, these traditional retailers have encountered stiff competition from home improvement retailers like Home Depot Inc. and Lowe’s Companies Inc., and, more recently, from electronics retailers such as Best Buy Co. Inc.

INDUSTRY TRENDS

In the highly competitive household durables industry, companies are taking steps to improve demand, and to control the underlying costs, for their products and their profitability. Steps include rolling out more innovative and affordable products, shifting production overseas, and selling their products through new channels.

WHAT DRIVES DEMAND?

Demand for household durables is driven mostly by increases in the number of households, which are determined by various factors, including household formation, which in turn is determined by population growth and changes in demographics. The rate of household formation is also determined by the state of the economy and social trends. Other factors that affect the level of demand for household durables could include the level of inflation, which not only dents the disposable income of consumers, but also the production costs of manufacturers. An increase in production costs partly translates into higher prices for consumers, who may be price sensitive in their purchase decisions depending on their economic situation.

Slower rate of household formations crimps home demand In the past few years, demand for new houses has been tempered by the slower rate of household formation. According to data in the 2014 US Census, the number of US household formations for June was around 434,000, an increase of 160,000 units or 58.4% from May. This shows an increase of 99,000, or 29.6% from 2013 year-on-year, and is lower than the long-term average of 1.147 million. We think the slower rate of household formation can be attributed to changes in US demographics and the state of the economy.

The baby boomers—those born between 1946 and 1964—comprise about 23.6% of the US population, according to the May 2014 US Census data. This group is now approaching retirement (the oldest started turning 68 in 2014). According to a 2014 study by Pew Research Center, a research and information firm, over 10,000 baby boomers will reach retirement age each day until 2030. As baby boomers get older, we expect the death rate to rise, thus reducing the rate of household formation. Additionally, we think baby boomers as retirees will have a lower purchasing power, which will lead to reduced consumer spending.

The recession has started a trend toward more multigenerational households in the US, which will have an impact on the rate of household formation. Even though the number of multigenerational households has been rising since 1980, the greatest increase came during the recent recession. According to a 2011 Pew report, a multigenerational household is composed of parents and children 25 years or older, or has three or


more generations, or grandparents living with grandchildren. The trend has been more prominent for young adults moving in with their parents, who are likely to support their child with additional income. In a study conducted by the Pew Research Center published in July 2014, nearly 57 million Americans, or 18.1% of the US population, lived in multigenerational family households in 2012.

Baby boomers are starting to retire The movement of baby boomers into retirement may lead retirees to sell their financial assets to meet their cost of living and discretionary spending requirements. The leading-edge baby boomers are turning 68 this year and have begun to retire.

According to the Federal Deposit Insurance Corp.’s latest Quarterly Banking Profile for the first quarter of 2014, home equity lines of credit decreased 1.4% sequentially for a 20th consecutive quarter, likely driven by lenders’ ongoing efforts to tighten lending in riskier credit lines. For the unemployed or underemployed with lower wages than before, a last resort, in our opinion, is tapping into 401(k) and IRA retirement plans and insurance policies to meet monthly expenses and mortgages that may be in arrears. Going forward, we expect home equity lending to increase as the economy improves and banks’ balance sheets continue to recover. In our view, this should bode well for home improvement appliance upgrades or shopping for home furnishings.

Baby boomer echo generation set to become first-time homebuyers The generation that follows the baby boomers—those currently between ages 18 and 44—accounts for around 28% of the US population, according to the most recent Census data. The older members of this group (those born from the mid-1960s to about 1980) are called Generation X; the younger ones are called echo boomers, Gen Y, or Millennials. This generation has entered (or is on the cusp of) the stage in life when many people purchase houses and form their own households.

Aging baby boomers and the negative effect on the rate of household formation is partially offset by their children leaving the parental home and starting their own families. However, the rate of household creation is muted by the uncertain economic environment and high unemployment, in particular for those who have just graduated from high school or college and are trying to enter the labor market for the first time. We think the sluggish economy is a major contributor, along with changes in the US social life, to echo boomers marrying later in life compared with prior generations. Thus, the recessionary conditions in the US have hurt housing demand by decreasing the rate of household formation, as well as by reducing consumers’ purchasing power.

We think, however, that there is a pent-up demand for houses, and it is beginning to assert itself as the economy shows signs of recovery. Further, according to a forecast released by the National Association of Home Builders (NAHB) in January 2013, the housing market segment catering to the 55-plus population is likely to prosper, with baby boomers increasingly looking for homes that better suit their lifestyle demands. The NAHB forecasts that housing starts in the 55-plus communities would increase 22% to reach 74,302 units in 2013 and 20% to reach 89,071 units in 2014.

Housing starts/homeownership rates Housing starts numbers are beginning to show modest growth (as noted earlier), though fueled mostly by multifamily units. The US Department of Commerce’s New Residential Construction report covers housing starts, permits, and completions. As of June 2014, housing starts for units in buildings with five units or more totaled 305,000. According to the NAHB’s Housing Forecast, dated February 2014, multifamily housing starts were estimated to increase by 333,000 units in 2014, a 9% increase from 306,000 units in 2013.

Owning a home remains a dream for many because consumers face strict credit guidelines, According to the US Census Bureau (CB), the homeownership rate dropped to 64.7% in the second quarter of 2014, compared with 65.0% in the second quarter of 2013. As a result, the rental market continues to see healthy demand. According to the Federal Home Loan Mortgage Corp. (Freddie Mac), there is a clear shift in favor of renting houses, which is particularly evident among the younger households. The homeownership rates have shown the sharpest decline for households headed by those under 30 years of age.


Income inequality Income disparity in the US is on the rise, with the nation beginning to fall into the ranks of developing countries on measures of income disparity. The US ranked 40 on the Gini Index released by the US Central Intelligence Agency’s World Factbook (as per data collected in 2007), not far above China, India, and Japan. According to the US Census data on distribution of aggregate income, in 2012, the top 5% of the US population earned as much as 22.3% of total income in the US, while the top 20% of the population earned 51.0% (i.e., more than half of the total income).

We think that the main cause of the income disparity is the different levels of education of the individuals. According to the US Census data, more than 14.0 million householders with a bachelor’s degree or more earned an annual income of $100,000 and more in 2009 (latest available). On the other hand, only 3.5 million householders with a high school degree earned an annual income of $100,000 and over.

This income inequality worsened during the recent recession and the subsequent economic recovery, with the difference in unemployment rates between those with a bachelor’s degree (or higher) and high school graduates widening. As of July 2014, the unemployment rate for high school graduates stood at 6.1%, while the rate for those with a bachelor’s degree (or higher) was only 3.1%.

Capital gains is another cause of the income disparity. According to an article in Forbes magazine dated November 20, 2011, the top 0.1% of total earners are garnering about half of all the capital gains on sale of shares and property after one year. According to the Congressional Budget Office, a nonpartisan federal agency that provides Congress with economic and budgetary data, over 80% of the increase in income inequality was due to a rise in the share of income from capital gains.

Bifurcated consumers Bifurcation of consumers is one of the most important consequences of the rising income inequality. While one set of consumers indulges in discretionary spending, another spends cautiously as per its budget. According to a study conducted by the NPD Group in 2011, a market research firm, 76% of the consumers surveyed belonged to the group that controlled its spending. Of the consumers in this group, a large number were either unemployed, less affluent, or retirees. The remaining 24% turned out to be more optimistic in their spending and seemed less affected by the recession.

The market is clearly divided into two broad consumer categories as a result: one that will not compromise on quality and will incline their spending toward high-end products, and another that is willing to trade down to other products in order to save money. Rising gasoline and food prices have also had a greater impact on the spending by low- and middle-income consumers than those with higher incomes.

We think that as the economy recovers, the job market will continue to favor those with more education and earning power. Therefore, when examining the household durables companies in our coverage universe, it is necessary to take a close look at the current economic state of a company’s target demographic. This is especially important in the current environment, given the rapid and sizable changes in the labor force over the past few years, as well as the likelihood of such changes continuing in the future.

FURNITURE AND APPLIANCE COMPANIES PRODUCE OVERSEAS

An increasing number of cheaper, foreign-made goods and rising commodity prices have forced both furniture and appliance manufacturers to shift much of their production overseas. At the same time, the increased emphasis by discount retailers to sell inexpensive furniture in their stores or warehouses is pressuring manufacturers to hold the line on costs. Warehouse club giant Sam’s Club is the nation’s fourth largest bedding retailer, with its massive size allowing it to wring lower prices from its suppliers.

In the furniture industry, the manufacturing shift to overseas means many companies simply design and engineer furniture in the US, then have it produced in China, the Philippines, Indonesia, Vietnam, and other lower-cost countries. Subsequently, many plants in North Carolina—a hub of manufacturing for the US furniture industry—have closed. For example, in the years from 2008 to 2010, Furniture Brands International Inc. closed, consolidated, or reconfigured eight manufacturing facilities and closed 24 retail stores. More


than 50% of the furniture industry’s revenue comes from products made overseas, mainly China, according to the company. While consumers may enjoy lower pricing, the quality of case goods furniture has declined significantly with the transfer to Asian manufacturing, in our opinion.

The shift to overseas manufacturing is not limited to US manufacturers. As part of a restructuring that started in 2005, AB Electrolux, the world’s No. 2 appliance maker, has closed down plants in Australia, Germany, Italy, France, and Sweden, and has opened new plants in Mexico, Poland, Thailand, and Ukraine. In its 2010 annual report, Electrolux said it completed its comprehensive restructuring program, which means the company will have a competitive production structure in which approximately 60% of its appliances are manufactured in low-cost countries. All production of vacuum cleaners is already located in such countries. Electrolux is continuously reducing its costs by utilizing its global reach and strength.

CHINA GAINS MAJOR SHARE IN US FURNITURE MARKET

Furniture manufacturers in the US have been steadily losing market share to foreign producers since the early 1990s. According to US government data, furniture imports have risen at about four times the rate of domestic furniture. The largest foreign supplier is China, with over half the market. The flood of cheaper Chinese wooden bedroom furniture on the US market has driven prices down sharply—by as much as 30% to 40% in some categories, according to our estimates. US furniture manufacturers have downsized significantly, having shed nearly 234,400 jobs in the past decade.

Total US furniture imports in 2012 increased 9.0% to $17.0 billion, from $15.6 billion in 2011. China held the No. 1 spot by a wide margin, with sales rising 8% to $9.7 billion, which represented over 57% of furniture imports to the US market. Vietnam was a distant second, at $1.9 billion (up 24%). According to a Furniture Today article dated December 31, 2012, China is facing a number of challenges such as high labor costs owing to a lack of government support for the furniture industry, which have resulted in a slight slowdown in China’s furniture export performance through 2012. However, the article stated that China’s share of US imports is still way ahead of any other Asian country. China ships 75% of its upholstery and 45% of its wood furniture exports to the US.

Upholstered furniture imports rising US upholstered furniture manufacturers are experiencing similar challenges, with rising imports (8% in 2013) from lower-cost countries such as China, Vietnam, India, and Indonesia driving prices downward. As the number and quality of fabric mills in China has increased in recent years, Chinese furniture manufacturers are eagerly introducing new upholstered furniture collections under private labels for major US furniture retailers. In recent years, upholstered furniture makers in China have become particularly active in entering the US market by forging relationships with key retailers. Most products are offered at retail prices ranging from $500 to $1,300—quite reasonable from a consumer’s perspective, but highly competitive from a manufacturer’s point of view.

Upholstered furniture can be reviewed in more specific categories such as stationary sofa and sofa sleepers, leather upholstery, reclining chairs and motion sofas. Some of the smaller product categories excluded from our review are stationary chairs, swivel and glider rockers, and futons.

Stationary upholstery. This product category includes stationary sofas, stationary chairs, and sofa sleepers. Estimated 2013 sales increased 1.2% to $16.4 billion, according to market research by Furniture Today and Easy Analytic Software. We are expecting a 3.0% sales increase for 2014 due to moderately improving economic conditions.

Leather upholstery. Estimated 2013 sales increased 1.2% to $10.9 billion, according to market research by Furniture Today and Easy Analytic Software. Furniture Today reports that demand for leather upholstery has remained strong, despite relatively high prices, due to its perceived value among consumers as a sign of an affluent lifestyle. That cachet, along with the gradual improvement in the US residential housing market, has led the vast majority of manufacturers to conclude that leather upholstery will have another solid year in 2014. We are expecting a 3.5% sales increase for 2014.


Motion upholstery. Estimated 2013 sales increased 1.3% to $10.9 billion, according to market research by Furniture Today and Easy Analytic Software. Sales of motion furniture and recliners are driven mostly by sales of flat-panel televisions, and sales of flat-panel televisions have softened recently. However, leading companies such as Lane Furniture Industries Inc., Berkline BenchCraft Holdings, LLC, La-Z-Boy Inc., and Best Buy Co. Inc. are introducing power recliners to attract new customers that would shun mechanical levers to open and close leg rests. Some of the new creative features include built-in electronics, massage units, and even built-in coolers. We are expecting a low-single-digit increase for 2014, given our outlook for slower sales of large TVs.

Imports of case goods rising One of the largest product categories for home furnishings is case goods, which includes dining rooms, bedrooms, and occasional furniture like living room tables and wall units. We think the larger-ticket items, such as dining rooms and bedrooms, may lag more value-priced items like kitchen tables, media centers or wall units, and children’s bedroom furniture. Sales in 2013 increased 0.3% to $26.6 billion, according to market research by Furniture Today and Easy Analytic Software. For 2014, we estimate category sales growth of 1.0%.

Furniture manufacturers are introducing new designs and furniture groups in anticipation of the economy improving. One lifestyle change has been the move away from a bedroom armoire to a media chest for a flat-panel television, along with a bedroom dresser, mirror, nightstand, and the option to select a sleigh bed or platform bed.

Bedding, bedding accessories increasingly important Another major category that is gaining in floor space at retail furniture stores is bedding and bedding accessories. Stressful lives during the recession may be leading some households to purchase new and improved bedding that offers a respite for a good night’s sleep. Following a sales decline in 2009, the bedding category has been recovering.

According to Furniture Today’s market research, bedding sales in 2013 increased 1.8% to $13.9 billion—relatively weak, following strong growth in the prior few years. The weakness was due to a decline in the specialty mattress segment. We think consumers are shifting toward other priorities that may have been neglected. In our view, households are willing to pay more for premium bedding. The caveat is customer satisfaction on getting a good night’s sleep, whether the bedding is traditional innerspring, latex foam, or a mix of the two bedding materials. Furniture Today reports that celebrities are getting into branded bedding, like Kathy Ireland with Therapedic or South Bay announcing a line of Jane Seymour bedding. Even Donald Trump is getting into bed with Serta’s new Trump Home line.

FURNITURE COMPANIES ADD NEW STORES, BUY INDEPENDENTS

Faced with the closing of many small independently owned furniture stores, as well as the demise of many large department store chains that had home furnishings departments, many large furniture manufacturers opened their own stores and galleries to sell their products. In our opinion, as the economy gradually recovers, we think these company-owned stores can gain market share with so many independent retail furniture stores going out of business.

Selling through their own branded or owned stores allows furniture makers to display their wares in a complete living room or bedroom setup, for example, which encourages consumers to buy an entire set at once rather than shopping piece by piece. The concept of grouping furniture from the same manufacturer also works in galleries located with independently owned retailers.

For manufacturers, other benefits of single-vendor stores include more floor space and higher brand profile than in a multivendor format, as well as more of a say in the choice of location and signage, and better information on what’s selling (and thus what should be produced). By building a network of their own retail locations, manufacturers also create a customer base for their products and enhance their brands. There is also greater efficiency in undertaking uniform store remodeling programs.


For retailers, the benefits of selling a single manufacturer’s goods include exclusive distribution territories, the efficiency of working closely with just one vendor, and brand-name recognition. While single-vendor stores may be smaller than multivendor units, such sites usually enjoy high levels of traffic, which boost sales and profits per square foot above those of traditional stores. Of course, we think a furniture brand that is well known and attractive to targeted households will make a difference.

Manufacturers that have opened more retail locations, or have bought out independently owned dealers, during the US recession include Ethan Allen Interiors and La-Z-Boy Inc. La-Z-Boy, a maker of motion furniture (which includes recliners and pullout sofas), operates La-Z-Boy Furniture Galleries, which

showcase the company’s namesake chairs, and offer in-store design centers and complementary at-home design service. The company says in areas where the at-home design service is available, average sales per customer have increased. La-Z-Boy is also relocating or converting stores to the newer gallery format. As of June 2014, La-Z-Boy had 315 stand-alone La-Z-Boy Furniture Galleries’ stores, and plans to add 30 to 35 store projects for fiscal year 2015.

Furniture retailer Ethan Allen Interiors says it is now in the market of offering interior design plans for a house, not just furniture. As of June 30, 2014, the company had approximately 300 stores, called Design Centers. In 2004, the company ended sale and promotional prices on its merchandise, and instead, lowered prices on furniture year

round. This strategy breaks with the furniture industry tradition of holding sales to clear out merchandise at reduced prices. The change may encourage customers to buy a piece of furniture that they like on the spot, rather than waiting for it to go on sale.

Furniture Brands also operates a number of company-owned stores and galleries. It owns branded stores such as the 46 Thomasville Home Furnishing Stores that can be two-thirds higher in-store sales than those of third-party retailers. In addition, there were 50 Thomasville dealer-owned stores in operation as of June 29, 2013. In September 2013, Furniture Brands filed for Chapter 11 bankruptcy protection, and went out of business on August 1, 2014. In late November, KPS Capital Partners received court approval to acquire Furniture Brands International's assets and renamed the company Heritage Home Group LLC.

Table B01: LEADING US DEDICATED FURNITURE RETAILERS

LEADING US DEDICATED FURNITURE RETAILERS(Ranked by 2013 sales of furniture and bedding)

NO. OF STORES WITH

- - - - - - SALES (MIL.$) - - - - - - FURNITURE & BEDDING

COMPANY 2012 2013 % CHG. 2012 2013

1. Ashley Furniture HomeStores 2,944 3,115 5.8 462 4932. IKEA 2,525 2,690 6.5 38 383. Williams-Sonoma 1,965 2,185 11.2 560 5544. Rooms To Go 1,610 1,780 10.6 130 1315. Mattress Firm 1,168 1,387 18.8 1,215 1,361

6. Berkshire Hathaw ay* 1,295 1,372 6.0 33 337. Pier 1 Imports 1,125 1,209 7.5 982 9918. Restoration Hardw are 890 1,205 35.4 66 659. Raymour & Flanigan 1,088 1,151 5.8 101 102

10. La-Z-Boy Furniture Galleries 902 1,017 12.7 285 281

11. Sleepy’s 976 1,000 2.5 895 93912. American Signature 957 960 0.3 126 12613. Sleep Number 902 922 2.3 410 44014. Bob’s Discount Furniture 685 758 10.6 43 4715. Havertys 670 746 11.3 122 119

16. Crate & Barrel 750 735 (2.0) 101 10317. Ethan Allen 704 702 (0.2) 207 20018. Art Van 515 555 7.8 72 8219. Sleep Train 448 471 5.2 273 29920. Mathis Brothers 372 418 12.4 17 18

21. Slumberland 394 417 5.9 126 12622. American Furniture Warehouse 348 406 16.7 12 1323. Cost Plus World Market 355 367 3.4 264 26524. Room & Board 296 344 16.2 13 1325. America’s Mattress 299 314 4.9 380 395

*Furniture division.Source: Furniture Today.


Single-vendor stores certainly have some disadvantages compared with multivendor operations. If a problem arises—if the franchisee retailer does not support the brand sufficiently, for example, or if the manufacturer does not keep commitments, such as timely product deliveries—it may be difficult and/or costly to terminate the relationship. Another disadvantage for single-vendor retailers is that because they rely on one brand or manufacturer, they generally do not have as much retail price discretion or offer as large a selection of products to help cover store overhead costs.

DISTRIBUTION

Showrooms, specialty stores, warehouse clubs, and discount and department stores provide customers with the opportunity to view comparable furniture and appliances in person, before making a purchase. Websites that are more comprehensive have also served as a source to review home furnishing products. Through marketing, merchandising, and display, retailers play an important role in influencing customers’ decisions, thereby directly contributing to manufacturers’ sales. Furniture makers are choosing to operate and/or own more of their own stores.

Specialty retailers and discounters alter distribution landscape Sears, Roebuck and Co. (a wholly owned subsidiary of Sears Holdings Corp., which also owns Kmart), no longer dominates the US appliance retailing industry. In May 2014, Sears posted a wider first-quarter loss, largely due to sales declines (despite giving huge discounts on merchandise). The company’s net loss in the first quarter of 2014 through May 3 expanded to $402 million ($3.79 a share) from a loss of $279 million ($2.63 a share), compared with the same period in 2013. Overall, revenue fell 6.8% to $7.88 billion, compared with $8.45 million in the first quarter of 2013.

Sears continues to face less traffic and newer, stronger competitors, and on June 16, 2014, This Week in Consumer Electronics (TWICE) Top 100 Major Appliance Retailers Report announced that Lowe’s overtook Sears as the largest appliance seller, registering a 11.3% sales surge and a nearly 40% share of Top 100 sales.

Furniture distribution in the US remains structure and dominated by specialized retailers, and discounters like Sears and other traditional retailers typically have sold goods at the manufacturer’s suggested retail price, drawing customers with their well-stocked inventories and knowledgeable salespeople. In contrast, Wal-Mart, Home Depot, and Lowe’s sell appliances at a discount to the suggested retail price. While they keep limited inventory in the store and provide less customer service, they have information kiosks where consumers can browse for more selections or order appliances.

Specialized dealers also dominate furniture retailing; however, as with appliances, this group is losing share to nontraditional retailers. According to Furniture Today, home furnishings retailers are rapidly gaining share from specialized furniture stores.

Specialty retailers’ merchandising expertise and their ability to introduce new design concepts on a regular basis (via their catalogs and the Internet) make them formidable competitors for retailers that primarily restrict their offerings to furniture. In addition, we think that strong brand popularity and rising confidence in catalog and Internet shopping may encourage consumers to purchase more expensive items (including furniture) from retailers like Pottery Barn (owned by Williams-Sonoma Inc.).

APPLIANCE COMPANIES INNOVATE TO DRIVE SALES GROWTH

Appliance companies are turning to technology to improve products in a bid to get consumers to trade up or spend more money on replacement appliances as home sales slow and consumers reduce their spending. Before the recession, consumers were eager to spend more for luxury goods. As consumers snapped up designer handbags, imported cars, and expensive jeans, they also splurged on top-of-the-line appliances from Miele & Cie. KG, Viking Range Corp., Sub-Zero Freezer Co./Wolf Appliance Co., Thermador, and other luxury brands. Some of these upscale suppliers have adapted many of the features found in the best appliances to fit mid-priced appliances, thus allowing them to compete better against Bosch Siemens, Whirlpool Corp., General Electric Co., Electrolux, and other large appliance manufacturers.


Aside from economic pressures, we see three trends that have dominated appliance product development in recent years. First, there has been a sharp increase in the number of “smart” appliances—sophisticated home appliances capable of automatically tailoring functions to the tasks. Second, appliances with features formerly deemed as high-end are now available to the masses. Third, the frills of luxury living aside, we think appliance makers are concentrating on environmentally friendly kitchen and laundry appliances. However, the deepening recession has taken its toll on the demand for higher-priced green and luxury brand appliances.

Appliances add technology To add perceived value and to distinguish their products from those of competitors, appliance makers have been adding more features to their products. As a result, today’s washing machine has evolved considerably from the first automatic washer, introduced by Maytag in 1949.

Technological innovations, notably in the field of electronics, have enabled appliance manufacturers to develop a host of innovative features. Many control panels have become highly sophisticated devices in their own right. Also called microcontrollers, these self-contained devices control the functions of an appliance and are found in laundry, kitchen, and other modern household appliances and electronic devices. In our opinion, while these digital pads or microcontrollers represent the leading edge for appliances, they are vulnerable to breakdowns and expensive replacements. As with automobiles, the mechanical parts of appliances may last a long time, but digital electronics are susceptible to defects and malfunctioning over time.

Sensors are another important set of digital components that have enabled manufacturers to expand the range of features in appliances, notably in washing machines. In some of the newest models, sensors can detect the quantity of laundry, how dirty the clothes are, and in some cases, even the fabric type. LG Electronics Inc.’s front-load washers measure the weight and size of a load of clothes and adjust the water level and wash-time to correspond. Prices for front loaders tend to be several hundred dollars higher than those of traditional top-load washers.

Consumers want their appliances to look good, as well as operate more efficiently. With larger homes and bigger bedrooms, many homeowners are moving the washer-dryer combo out of the basement to upscale laundry rooms and even second floor locations near the bedroom. Homes in North America generally have more room for laundry appliances than do homes in Asia and Europe, and consumers take advantage of this space. That has led manufacturers to make more front-load washers and dryers that move beyond basic white into sleek black, pewter, eco-green, and even champagne-colored and cherry-red exteriors. The website of electronics retailer Best Buy Co. Inc. even allows users searching for an appliance to sort by color in addition to price and features.

Used together, microcontrollers and sensors have greatly improved the precision, motor efficiency, load-balancing ability, and overall washing capabilities of today’s washers. During the spin cycle a washing machine is subject to vibrations caused by unevenly distributed clothes inside the drum, especially with front-load washers. Sensors detect and measure the vibrations, determine the degree of imbalance, and, in conjunction with the microcontroller, modify the motor speed to rebalance the load. Advanced microprocessor technology has become very affordable and enables these functions to be completed automatically and in real time—often before the vibrations become a nuisance to the user.

Recent product launches have taken further strides toward marrying laundry appliances with state-of-the-art technology. In November 2012, Whirlpool launched its 6th Sense Live technology system for washers and dryers that helps customer service representatives quickly and efficiently troubleshoot issues over the phone, hopefully reducing the number of service calls required. Furthermore, when service is required, the arriving technician is better prepared and can come equipped with the correct tools and parts. This new line of models can also reduce customers’ energy bills by connecting to the Smart Grid used by utility companies and selecting the optimal time of day to operate. Whirlpool has developed apps for the iPhone and iPad that allow users to manage and control their washers and dryers even when they are away from home and alert them when the washing cycle is completed.

Apart from washers and dryers, other appliances are also getting smarter. Dishwashers have soil sensors that detect dirt, and automatic water temperature controls that save energy. Ceramic cook tops have sensors


that optimize heating and cooling capabilities, and ensure safety. At the January 2013 Consumer Electronics Show in Las Vegas, Samsung announced its Android-based T9000 refrigerator with a 10-inch Wi-Fi-enabled touchscreen that can let the user run apps, create notes, and share clips and photos. Most of the leading appliance manufacturers are coming up with “smart” appliances that can connect to the Internet and to other appliances in a household.

Manufacturers are betting consumers will agree that the latest technologies provide tangible benefits that justify paying more than they would for traditional appliances. Although the recent recession has delayed household purchases, consumers have mostly been eager to upgrade their appliances more frequently. Product replacement cycles shortened significantly largely due to demand for innovative appliances. However, for certain appliances, increased raw material costs due to environmental mandates (such as RoHS, REACH, and halogen-free), as well as higher labor costs, have led to higher prices overall. In addition, more advanced electronics may increase customer service repairs. Retailers have encouraged customers to sign extended warranty contracts that cover all parts of laundry and kitchen appliances. Although these service contracts are outsourced to third parties, some manufacturers require service personnel to be trained and certified with their brands.

Improved functionality: a driver of innovation Aside from wanting better functionality, technology buffs and luxury consumers look for appliances with increased capacity, shorter function times, convenience, and reduced noise. Whirlpool has launched several such products.

In early 2006, Whirlpool introduced the Maytag Ice2O, the first French door refrigerator that provides ice and water on the door. The company’s Cabrio top-load washers sport a 4.5-cubic-foot capacity, or the equivalent of three typical laundry baskets. Whirlpool claims that the Cabrio combo reduces total laundry time, thanks to the washer’s ultrafast spin speed and the dryer’s accelerated drying time. The washing is supposed to use less than half of the energy and water consumed by other conventional top-load washers. In May 2009, Whirlpool upgraded the Duet washer and dryer so that energy usage is 80% less, and water usage is 74% less, than a traditional top-load washer. This equates to $837 in savings over the first five years of use, according to the company. The dryer is the second largest user of energy next to the refrigerator.

Whirpool has developed accessories that complement new appliances. Whirlpool estimates that selling accessories such as a storage tower that sits alongside a new washer and dryer as well as pedestals that raise the height of the machines and provide additional storage space can generate $200 million to $800 million in incremental sales.

The new products are sold at higher price points, and usually with higher margins. As a result, the companies are pouring time and money into coming up with new and better appliances. Whirlpool has one new product, the SpeedCook, which cooks in four ways: it is a true convection oven, a rapid SpeedCook oven, a microwave, and steamer, all in one. Whirlpool believes its true convection cooking system produces the same flavorful results as a traditional convection oven and that the true convection has one of the most efficient ventilation systems in the industry.

In order to appeal to a wide range of kitchen décors, the SpeedCook appliance is offered in stainless steel, monochromatic stainless, black-on-black, and white-on-white exterior finishes. Innovative products are able to command premium prices. LG Electronics’ 4.7-cubic-foot capacity SteamWasher, which offers more than 20 settings, was available for $900 at retail as of January 2014. The stainless steel colored machine is front-loading and features technology that monitors water temperature to avoid wearing out clothes. At the other end of the spectrum, General Electric offers a top-loading, 3.3-cubic-foot washer: the white-on-white machine, with just six wash settings, was available for about $387 at retail as of January 2014.

What else has come through the pipeline? Competition among appliance manufacturers has become more intense as technology advances. In June 2014, Whirlpool received its first Energy Star certification for clothes dryers. According to the US Environmental Protection Agency (EPA), over 80% of US homes have a clothes dryer, which accounts for approximately 6% of residential electricity consumption. With the new standard, utility cost savings will


grow to more than $1.5 billion each year and more than 22 billion pounds of annual greenhouse gas emissions will be prevented. In September 2010, Miele announced a new line of dishwashers with a high-temperature final rinse that meets stricter hygiene requirements as it is expected to greatly reduce bacteria levels. The models are likely most appropriate for homes and institutions that require a higher level of hygiene, including day care centers and retirement homes.

GE Profile and GE Monogram ovens have Trivection technology that combine thermal, Precise Air convection, and microwave energies to cook food up to five times faster than a traditional oven. Precise Air convection systems use an innovative fan that reverses direction for optimal air and heat circulation.

GE Appliances has been innovative with its new dishwashers—its SmartDispense dishwasher has a reservoir that holds an entire 45-ounce bottle’s worth of liquid dishwasher detergent that automatically dispenses just the right amount for every load. The company’s new dishwashers also have an angled rack dry system that securely holds mugs and cups at an angle so water will not pool on top.

In late 2009, GE Appliances launched Energy Star, a US Department of Energy (DOE) standard residential water heater called the GE Hybrid Electric Water Heater and GE Tankless Gas Water Heater. The hybrid electric water heater will use less than 50% of the energy of a traditional water heater while providing the same amount of hot water.

Standard appliance makers are also trying to grab a piece of the luxury market, which includes such manufacturers as Sub-Zero, maker of its namesake freezers and refrigerators, and Wolf or Viking ranges, ovens, and cook tops. High-net-worth consumers rated these three appliance makers as the most prestigious home appliance brands in the 2010 Luxury Brand Status Index (LBSI) survey from the independent, New York-based Luxury Institute (www.LuxuryInstitute.com). These appliance brands rank highly for delivering consistently superior quality and thereby building strong brand affinity. We would add Miele, a luxury German manufacturer that promises 20 years or more of life for their kitchen appliances, along with direct service support from the company.

AB Electrolux has substantial market share for all major kitchen appliances and has a long tradition of continuously reducing its products’ water and energy consumption. For large household appliances like refrigerators, more than 80% of the total environmental impact occurs during operation. The company has tested that improved energy performance means lower lifetime operating costs for consumers.

Competition from non-US appliance makers increases consumer choice Traditionally, US companies like Whirlpool battled a small group of domestic competitors. Increasingly, however, domestic manufacturers are facing competition from Asian firms, including South Korea-based LG Electronics Inc. and Samsung Electronics Co., as well as Europe’s largest appliance manufacturer, AB Electrolux. China’s leading appliance maker, Haier Group, is beginning to make inroads in Asia and Europe.

GE Appliances, which is owned by General Electric Co. (GE), is a leading US manufacturer. Headquartered in Louisville, Kentucky, GE Appliances is a $5 billion to $6 billion business that employs about 12,000 people worldwide. It produces and services major home appliances, including refrigerators, freezers, electric and gas ranges, cook tops, dishwashers, clothes washers and dryers, microwave ovens, room air conditioners, and residential water systems for filtration, softening, and heating. Brands are GE Monogram, GE Profile, GE, Hotpoint, and GE Café.

LG Electronics. LG is currently a top-five appliance maker, behind Whirlpool and Sweden’s Electrolux. LG sells a variety of refrigerators, washing machines, and dishwashers at a number of major US retailers, including Home Depot Inc., Best Buy Co. Inc., Lowe’s Companies Inc., and Sears, Roebuck and Co. LG has incorporated products from its consumer electronics division (which includes cell phones and flat-panel televisions) into its appliance designs. One refrigerator model, for example, has a liquid-crystal display (LCD) television screen built into the door.

Samsung Electronics. This company, known for its televisions and cell phones, has developed a full line of cooking and laundry appliances in the past two years. As with LG Electronics, the same major US retailers


market this company’s appliance products. The company’s innovation with laundry appliances includes Vibration Reduction Technology (VRT) that produces a smooth and quiet operation at spin speeds up to 1300 revolutions per minute. This significantly reduces vibration and noise, even with unbalanced loads.

Electrolux. Well established in Europe for more than 80 years, the company has gained market share in North America, Latin America, and Australia. Approximately 40% of its total sales now come from North America. Electrolux has brought a record number of new appliances to market in the last two years—a benefit of its substantial investment in a new product development management system.

For Asian companies, cheaper labor in their home markets means lower-cost structures. This has forced US manufacturers to change their business models and product lines in order to cut their own costs. To remain competitive, however, Asian firms are outsourcing to places with even lower costs. LG, for example, manufactures only high-end products in Korea; half of its appliances are made at lower-cost plants in China.

Another way Asian companies are remaining competitive is by developing innovative products and designs. Both Samsung and LG have contracted with fashion designers to improve the looks of their washing machines and other appliances. It seems all the major appliance makers are now offering a choice of shocking colors besides standard white trim. The companies are taking market share from US rivals by bringing new products to the US market, including front-load washers and robotic vacuums.

Regional review Below, we look at the appliance market in several geographic regions.

Europe. Europe is an attractive but highly competitive opportunity for Asian and US-based appliance manufacturers, in our view. The continent’s population exceeds that of the United States by about 30%, and saturation levels for many major appliances are half of what they are in the United States. Over the next several years, the appliance market most likely will grow faster in emerging Central and Eastern European countries than in Western European economies. However, all areas of Europe have slowed from the recent recession and debt crisis, and are slowly recovering.

Europe’s appliance manufacturing industry is beginning to resemble the US industry in terms of fragmentation, with some consolidation of the 20 companies that make major home appliances. Most make a limited range of products for a specific geographic region. (By contrast, the United States has approximately five to 10 manufacturers of home appliances, depending on the type of appliance.) Thus, we think significant opportunities exist in Europe for larger manufacturers like Bosch Siemens, AB Electrolux, Indesit Company SpA, Whirlpool, Arcelik Sirketi, and Fagor, which is part of Mondragón Corporación Cooperativa, to take market share away from smaller companies or to acquire those companies outright. With economies still relatively weak, the European appliance market will remain challenged in 2014, in our opinion.

Asia. In terms of population and potential spending power, Asia is the world’s largest consumer market. At some point in the twenty-first century, the region could consume as many appliances as—or even more than—North America and Western Europe combined. Matsushita Electric Industrial Co. Ltd. is the largest appliance manufacturer in Japan, and Haier Group Co. is China’s leading producer. In our opinion, Haier Group continues to look for appliance acquisitions in North America and Europe to gain market share and to establish distribution channels, which take years to develop. Whirlpool controls about one-third of the Indian market and is the market share leader for washing machines in Hong Kong.

Latin America. This region is becoming a major growth market for select appliance makers. It is currently fragmented, with about 25 home appliance manufacturers; of those companies, Whirlpool and its majority-owned subsidiaries have more than a one-third share, far more than its closest rivals. Productivity initiatives and cost controls more than offset materials and energy increases for the company in this region.


HOW THE INDUSTRY OPERATES

Household furnishings have been part of domestic life for a millennium. The business of making and selling these goods on a large scale is an ongoing invention. Perhaps the nineteenth century deserves credit for creating widespread supply of, and demand for, upholstered chairs, bookcases, floor coverings, and other amenities. Along with its scientific discoveries and capital accumulation, the Industrial Revolution precipitated the formation of large manufacturers of such furnishings, inaugurating the household durables industry as such. Over time, progressive technological developments yielded such innovations as the electric washing machine, refrigerator, and other modern appliances now considered necessities.

The household durables industry today comprises three broad segments. The first consists of major appliances (including washing machines, clothes dryers, dishwashers, ranges, refrigerators, freezers, microwave ovens, and air conditioners). The second group includes smaller and less costly appliances (vacuum cleaners, hair dryers, food processors, bread makers, and coffee machines) and tools (hand tools, such as hammers and screwdrivers, and electric-powered tools, such as drills, sanders, and saws). The third segment is home furnishings, defined broadly to include furniture (sofas, dining room sets, bedroom furniture, bookshelves, and accessories), floor coverings (tile, laminate, hardwood, and carpeting), and bedding.

The common element among all of these household products is that they are durable and have a useful life of at least three years. In some cases, they can be expected to last 20 years or more. This Survey concentrates on the major appliance and furniture categories.

MAJOR APPLIANCES

According to the Association of Home Appliance Manufacturers (AHAM), an industry trade group, the largest home appliance category (in terms of unit sales) has historically been cooking equipment: electric and gas ranges, microwave ovens, and cook tops. The next categories are laundry, food preservation, and kitchen clean-up equipment.

Manufacturing The production of appliances and other durable household products is capital intensive, with significant up-front and ongoing cash costs. Companies that want to expand can add to existing facilities or build new plants on vacant land. For example, building a new manufacturing facility from scratch would likely cost between $100 million and $800 million, depending on its capacity. The buildings themselves are relatively inexpensive; the major cost involves purchasing tools and dies. For example, in April 2012, Whirlpool opened a one-million-square-foot premium cooking products manufacturing facility in Tennessee. The $200 million project included a state-of-the-art production facility and distribution center.

Manufacturing facilities are highly mechanized, with assembly lines designed for long production runs. Consequently, the industry’s fixed costs are moderately high. However, the business also has a significant variable cost element: it is somewhat sensitive to price changes in raw materials and components. Most major manufacturers do not depend on a single source for raw materials or purchased components. Some materials can experience significant demand and pricing pressures, but such occurrences are not likely to cause any production bottlenecks in the short term.

Because of the industry’s high level of automation, labor is a relatively small percentage of appliance makers’ costs. Labor expense generally can be reduced when product runs are suspended temporarily, but equipment and facilities still require maintenance, albeit at a lower cost than when in full operation.

Research and development (R&D) incurs ongoing expenses. New products and features must be introduced in order for a company’s goods to remain competitive in otherwise undifferentiated markets. In addition, consumer demand forces manufacturers to create innovative features and styles that suit customer needs. In the short run, companies can reduce R&D spending when cash needs to be conserved.

Whirlpool’s manufacturing goal is to enhance its global competitive position by reducing costs, driving productivity and quality improvements, and accelerating its rate of innovation. The company intends to


make additional investments to improve its competitiveness in the current year. Whirlpool projects its capital spending at $675 million in 2014, in support of its investment in innovative product technologies and its global operating platform initiatives. Whirlpool’s capital expenditures totaled $593 million in 2010, $608 million in 2011, $476 million in 2012, and $578 million in 2013. As of the first quarter of 2014, the company showed a record capital expenditure increase of 66.2% from the first quarter of 2013.

Distribution Finished appliances are usually shipped to regional warehouses and then trucked to retailers. Because of their high-volume purchases, major retailers, such as Sears Holdings Corp., often receive shipments directly from the manufacturing facility to their own warehouses.

Consumers purchase most appliances from retail outlets. The primary reason is that large products (such as washers, dryers, and refrigerators) usually need professional installation, which retail outlets can provide by keeping trained workers on staff. In addition, customers typically wish to inspect major appliances in person before purchasing.

The Internet is becoming an increasingly popular distribution channel as well, but traditional bricks-and-mortar retailers are the primary beneficiaries. Most customers prefer to view the merchandise in stores before placing their order on a well-known retailer’s website (see this Survey’s “Current Environment” section for more information on showrooming). There has been a shift in appliance retailing to larger stores like Best Buy, Home Depot, and Lowe’s from smaller independent retailers. Many of these smaller stores have moved to niche segments, marketing more expensive luxury brand models.

Marketing considerations We think appliance manufacturers are looking to major developing countries for new revenue growth as developed markets in North America and Europe have high penetration rates for major appliances. In our opinion, there are market opportunities for the leading global appliance manufacturers to gain market share from smaller suppliers that may only have a country or regional presence, at best.

Depending on replacement demand, housing starts, general economic conditions, and saturation levels, demand for appliances can vary from year to year. Each factor affects product categories differently; therefore, yearly demand varies among the product categories.

Replacement demand. The most powerful driver of appliance sales is replacement demand, which normally accounts for about 75% of all appliance purchases. (This ratio may be even higher in the US and Europe during the current difficult economic period, in our opinion.) A certain level of replacement demand is essentially guaranteed, since appliances have limited life spans. Consumers’ need for functional equipment results in more predictable demand cycles for appliances than for other consumer durables. Although consumers can defer or accelerate some purchases, they usually replace broken or worn-out appliances quickly. Just as appliances’ expected life spans differ by category, an appliance manufacturer’s exposure to replacement demand depends on its product mix.

Home remodeling and existing home sales are other factors that encourage replacement. People who buy an existing home tend to replace one or more appliances, regardless of the original equipment’s condition. However, economic recessions tend to motivate households to repair older appliances instead of replacing those items with more attractive, brand new appliances. In additional to mechanical breakdowns, the challenges for households are the high costs for replacing digital electronic keypads on major appliances.

Changing trends and tastes in housing design can render appliances prematurely obsolete. For instance, many homeowners presently are moving laundry equipment out of the basement for reasons of space or convenience. Placing equipment in a washroom near the kitchen or near the master bedroom has become increasingly popular. As a result, many consumers have opted to trade in older but working models for newer versions with the look, size, and degree of quietness they desire. Stainless steel exteriors for kitchen appliances have been the hottest trend right now.


The level of price inflation also affects replacement demand. When price inflation is low, and the incremental cost of buying a new appliance declines versus repairing and operating an older one, buyers will prefer to purchase a new appliance.

Housing starts. The residential construction market is the second-most important source of demand for appliances, accounting for about one-quarter of all appliance shipments. We suppose this ratio may have decreased during the current recession. On average, each new housing start directly or indirectly represents four or five appliance units, including a refrigerator, a dishwasher, an oven and cook top (or a range), and laundry equipment. (See this Survey’s “Key Industry Ratios and Statistics” section for more information on housing starts.)

Economic conditions. The state of the domestic economy is an important driving force behind appliance volume. A strong economy, a high degree of consumer confidence, and a favorable (i.e., low or declining) interest-rate environment can encourage consumers to become first-time homeowners or to “trade up” to a larger home. Those home purchases, in turn, spur appliance sales. In contrast, when the economy is weak and consumers lack confidence, a decline in home sales will dampen demand for appliances.

Saturation. In the appliance industry, saturation refers to the percentage of households that own a particular item. “Full saturation” means each household owns at least one unit.

The US market is fairly saturated for most appliances, which means that demand arising from first-time purchases in existing households is generally limited, while demand in the new home and replacement markets prevails. For instance, refrigerators and cooking equipment (excluding microwaves) have essentially been 100% saturated since the 1970s, and thus are sold primarily to consumers who are replacing old models and to the new housing market. However, a substantially smaller percentage of households own dishwashers and laundry equipment, which thus may be sold to first-time buyers, as well as to the replacement and new home markets.

Saturation levels for many appliances are much lower in other regions, such as Asia, Latin America, and Eastern Europe. We expect to see strong unit growth in future years as per capita income rises in these areas.

Seasonality. Sales of certain appliance products are seasonal. For example, in the United States, room air conditioners and dehumidifiers generally are produced and sold in the first half of the year. Portable appliances and microwave ovens are more likely to sell in the second half of the year. Consumer electronics tend to show high unit shipments in the third quarter, followed by peak sales during the fourth quarter holiday shopping season.

In Europe, clothes dryers generally are purchased during the winter. In Asia, refrigerators tend to sell in greater numbers in the summer months, while demand for washers is stronger in winter. In South America, refrigerators and room air conditioners are purchased mostly in the second half of the year. Despite the seasonality of individual categories, overall sales do not fluctuate significantly for a major appliance manufacturer with well-diversified global operations.

Individual category demand Despite the differences in their demand drivers, all categories are price sensitive. For example, range sales depend more on housing starts than do other categories, because their long life expectancy limits replacement demand. This fact, together with the range market’s high saturation levels and small number of units sold annually, means that the market is highly competitive for a relatively small amount of business. According to Appliance, an industry trade magazine, electric and gas ranges will last between 12 and 16 years.

Dishwashers are sensitive to new housing starts, but they possess low saturation levels and have a comparatively short life expectancy of seven to 10 years. Thus, while dishwashers are not universally regarded as must-have items, consumers who do want them need to replace them relatively often. Thus, sales volume should remain moderate.


The refrigerator sector is the largest in terms of the value of goods sold and the second largest in terms of unit volume. As noted above, the market for refrigerators has been fully saturated for decades; volume is driven largely by replacement demand. Standard refrigerators typically have a life expectancy of between 10 and 18 years; compact models last between eight and 12 years; freezers, eight to 16 years.

Microwave ovens are first in volume sales. Individuals rather than builders generally purchase them, so they are comparatively insensitive to housing starts. Increasing penetration of this product, combined with a modest life expectancy of seven to 10 years, should keep sales climbing.

Clothes washing machines were present in 95% of US homes in 2008, making this segment highly saturated. Clothes dryers, however, are considered less essential and are owned by about 85% of US households. Electric and gas clothes dryers have a life expectancy of 12 to 22 years, while clothes washing machines typically last between seven and 14 years. Demand is driven by replacement activity, with washers selling in greater volume than dryers.

Regulation and environmental standards Not only is consumer demand forcing appliance manufacturers to become more innovative, so is the US Department of Energy (DOE). Under the National Appliance Energy Conservation Act of 1987, the DOE set new standards limiting energy consumption by new appliances. Every five years, according to the law, appliance manufacturers must reduce the amount of energy needed to operate appliances. The size of the reduction required varies by the appliance category.

Refrigeration products were the first category for which this law was implemented. According to Appliance, refrigerator manufacturers did not have serious problems developing products to meet the first energy-efficiency standard: a 25% energy reduction by January 1, 1993. However, the second energy-efficiency standard, which called for an additional 30% improvement, was pushed back (from a 1998 deadline) before being implemented in July 2001.

In addition, the industry was directed to eliminate ozone-depleting chlorofluorocarbons (CFCs) from refrigerators. In the fall of 1992, members of the Montreal Protocol, an organization created to address worldwide environmental hazards, drew up a schedule for phasing out CFCs completely by January 1, 1996 and less active hydrochlorofluorocarbons (HCFCs) by 2030. Most major US appliance manufacturers have met this environmental standard.

In January 2006, the US government raised the new appliance efficiency standards, representing the first stage of a new, stricter mandate. The five-year plan aims to achieve a maximum efficiency that is technologically feasible and economically justified. The government predicts that improved efficiency in home appliances will save US consumers $93 billion by 2020. Since January 1, 2007, washing machines have faced more stringent requirements in their use of electricity and water in order to carry the Energy Star label. (The Energy Star label is a voluntary program from the US Department of Energy (DOE) and the US Environmental Protection Agency (EPA) that signifies to consumers the most energy-efficient appliances.) The new standards will raise the efficiency of clothes washers by 37% and save as much as 8.9 billion gallons of water annually.

In July 2006, the European Union (EU) put into place the Restriction of Hazardous Substances Directive (RoHS), which bans the use of six hazardous substances, including lead and mercury, in products shipped to EU countries. For manufacturers, new mandates generally incur significant additional costs in time and product development.

Impact of the ARRA The American Recovery and Reinvestment Act of 2009 (ARRA) extended many consumer tax incentives originally introduced in the Energy Policy Act of 2005 (EPACT) and amended in the Emergency Economic Stabilization Act of 2008.

Home Energy Efficiency Improvement Tax Credits. Consumers who purchased and installed specific products, such as energy-efficient windows, insulation, doors, roofs, and heating and cooling equipment, in existing homes could receive a tax credit for 30% of the cost, up to $1,500, for improvements “placed in


service” starting January 1, 2009, through December 31, 2010. The complete list of products eligible for the tax credit was available from the DOE.

Residential Renewable Energy Tax Credits. Consumers who install solar energy systems (including solar water heating and solar electric systems), small wind systems, geothermal heat pumps, and residential fuel cell and micro turbine systems can receive a 30% tax credit for systems placed in service before December 31, 2016; the previous tax credit cap no longer applies.

HOME FURNISHINGS

Case goods, upholstered furniture, and bedding and floor coverings are the furniture market’s primary segments. Below, we consider these segments’ characteristics with respect to manufacturing, distribution, and economic variables.

Case goods The wood furniture market is highly diversified, with goods distinguished in terms of type of wood, style, price, and end use. This market is known as the case goods segment because manufacturers typically ship dressers, tables, and dining room suites in cased crates. Bedroom and dining room furniture make up the largest portion of this market. These are usually big-ticket items, so demand for wood furniture tends to lag economic recoveries.

In recent years, case goods producers have emphasized quality by monitoring the entire production process, from the selection of raw materials to construction, finishing, and packaging. In addition, companies today also stress price points and basic styling features, and they are trying to improve their shipping schedules.

Price points and categories. Case goods manufacturers offer their designs at low, medium, and high price points. The industry produces furniture for four basic categories: bedroom; formal and casual dining; occasional tables; and curios and entertainment centers. In our opinion, case goods furniture imported from Vietnam has higher quality veneer and lacquers compared with imports from China or other Asian countries.

Major styles. The furniture made by case goods manufacturers comes in six main style categories: American, contemporary, European country, Asian, eighteenth-century English and American, as well as other traditional styles. We think the decline of US manufacturing has led to inferior lacquers and veneer on imported case goods, with the exception being case goods imported from Vietnam.

In American-style furniture, design subcategories include colonial/early American, American country, Mission/Arts and Crafts, Southwestern, and Shaker. Contemporary furniture includes Art Deco, casual contemporary, architectural contemporary, European modern, and Scandinavian designs. The European country furniture segment comprises English country, French country, and Mediterranean styles.

Asian-style furniture embraces design influences from Japan and China. Eighteenth-century English and American styles are grouped within a single category. Under the catchall category of “other traditional styles” are campaign, formal French, Italian, neoclassic, European traditional, and Victorian designs.

Upholstered furniture Upholstered furniture is produced in the same design categories as case goods furniture. Upholstery fabrics include prints, velvets, jacquards, textures (such as chenille), coated fabrics (such as vinyl), and leathers.

Motion furniture, a subcategory of the upholstery sector, includes reclining chairs, pullout sofas, and sectionals. Few manufacturers enter this arena, however, because the machinery needed to make these goods requires a larger capital investment than is needed to produce most other kinds of furniture. Companies that manufacture motion furniture continuously refine their mechanism technologies. Recent reclining chair innovations include glider recliners and wall-proximity models. Manufacturers have been combining these advances with more sophisticated styling in an effort to reach a broader segment of the consumer market. The major public company that makes motion furniture is La-Z-Boy Inc., Lane Furniture, and Berkline.


Other categories Other furniture categories include bedding, ready-to-assemble furniture, and casual furniture. Taken together, these segments account for about 10% of the furniture market. In addition, we would add the floor coverings industry as part of household durables.

Bedding. Bedding generally refers to hard goods such as mattresses and box springs or foam material. (Sheets, comforters, and the like are referred to as soft goods.) Leading suppliers of bedding include Serta Inc., Simmons Co., and Tempur Sealy International Inc. (including its subsidiary, Sealy Corp.).

Ready-to-assemble (RTA) furniture. RTA furniture includes unassembled items that are shipped in boxes. These products are then put together at the store or at the customer’s home. Typical RTA pieces include television and videocassette recorder cabinets, home entertainment centers, and home office furniture; the last is one of the industry’s strongest growth categories. Leading manufacturers of RTA furniture include Bush Industries Inc., Canada-based Dorel Industries Inc., O’Sullivan Industries Holdings Inc., and Sauder Woodworking Co.

Casual furniture. Casual furniture includes resin furniture (the largest category), brass beds, aluminum and wrought iron outdoor furniture, chrome and brass dinette sets, metal card tables, and kitchen stools. Major suppliers of casual furniture include Grosfillex UK Ltd.

Floor coverings. The structural framework for this industry varies by type of floor covering. We consider carpet and rug industry as highly concentrated with a few large manufacturers like Mohawk Industries and Shaw Carpet, which also offer other floor covering products. The ceramic tile market is more fragmented at both the manufacturing and distribution levels. Harwood and laminate market appear to have a large number of US and foreign manufacturers.

Manufacturing The production process for home furnishings, like that for appliances, is capital intensive. Manufacturers must invest in factories and equipment (machinery for cutting, sanding, drilling, sewing, finishing, etc.) needed to convert raw materials to finished products. Given the greater variety of product colors and styles for furniture, home furnishings’ production runs are generally smaller than those for appliances, although they may be more numerous.

High-quality furniture, both case goods and upholstered, tends to have more labor content (including finishing work) than mass-produced furniture or appliances. Case goods facilities are often located close to sources of raw materials and skilled artisans. Upholstery facilities tend to be scattered across the country to reduce shipping costs to retailers.

Some home furnishings manufacturers, including Ethan Allen Interiors Inc., Furniture Brands, and La-Z-Boy, also have retail-owned stores combined with independent dealer stores. Vertical integration gives them the ability to maintain tighter control over cost, quality, and service.

The most important raw materials in furniture are lumber, veneers, plywood, particleboard, hardware, lacquer, finishing materials, glass and mirrors, laminates, and fabrics. Various types of wood include cherry, oak, maple, primavera (white mahogany), mahogany, birch, and pine, most of which can be purchased domestically. Fabrics are purchased domestically and abroad.

There are numerous suppliers for most of these materials, so long-term contracts usually are not necessary; competitive pricing for raw materials is the rule. Although lumber prices do fluctuate and rising prices normally have a short-term impact on margins, higher costs usually can be passed on to customers through retail price increases unless there is a severe economic recession.

The floor coverings industry is exposed to risks in the prices of raw materials and fuel-related costs. Manufacturers need to have a broad range of offerings of color, textures, and finishes, as well as the newest technology for making and finishing different floorings. Some manufacturers, such as Mohawk Industries, are vertically integrated, and their processes include the extrusion of resin and post-consumer plastics into


polypropylene, polyester and nylon fiber, yarn processing, backing manufacturing, tufting, weaving, dyeing, coating, and finishing. Capital investments are geared to boost capacity, improve productivity, and reduce production and distribution costs.

Distribution Manufacturers that have some control over retail distribution—through company-owned stores, independent dealer networks, or other contractual arrangements—often gain a competitive advantage. Most major home furnishings manufacturers and retailers have regional warehouse distribution facilities located strategically near a cluster of stores. This lets them provide prompt delivery of in-stock items, reduce inventory requirements at individual stores, undertake more efficient production runs, and make available a broader selection of merchandise.

To enhance distribution efficiency, companies often use sophisticated cantilever racking and computer-controlled random-access inventory storage. In addition, many manufacturers employ their own drivers (rather than subcontracting the work), maintain a fleet of trucks and trailers to ensure quality control, and offer customers delivery and setup at no additional cost.

Home furnishings retailing is fragmented, although it has undergone some consolidation. Larger furniture stores have been promoting aggressively on price to gain market share—a practice that has penalized profit margins across the industry. These stores often advertise their promotions via radio, television, magazine, and newspaper advertisements. In addition, retailers frequently send direct-mail circulars and special catalogs to potential customers; such promotions target specific demographic sectors.

Carpet and rug flooring suppliers market and distribute their products to independent floor covering retailers, home centers, mass merchandisers, department stores, commercial dealers and institutions such as healthcare and other nonprofit institutions. Premium brand carpets often sell primarily in the medium- to high-end retail price channels in the residential broadloom market. Other brands may be used for value retail or bargain discount retail price channels.

Ceramic tile, porcelain tile, and natural stone products are distributed through retailers, contractors, commercial users, independent distributors, and home centers. In some cases, manufacturers may have their own sales service and home design showrooms.

Economic variables The home furnishings business is cyclical; demand is greatly influenced by housing starts, remodeling activity, interest rates, the unemployment rate, disposable personal income, and consumer confidence levels. (See the “Key Industry Ratios and Statistics” section of this Survey for more information.)

Like appliances, most home furnishings are big-ticket items. However, furniture is more discretionary; replacing a worn-out sofa is usually less of a priority than a broken refrigerator. Consumers generally require a relatively optimistic view of the economy and their job security to buy new furniture, whether with cash or on credit. During a recession, they are likely to defer upgrading their home furnishings.

Low and/or declining interest rates directly encourage purchases of furniture and other home furnishings in two ways. First, they reduce monthly mortgage payments and may stimulate household durables purchases, which in turn could boost furniture sales. Second, they decrease financing costs for consumers, thus increasing the affordability of home furnishings purchases.

Upholstered furniture is usually the first furniture category to experience renewed demand after a recession. It generally has a shorter replacement cycle than wooden or metal furniture because its upholstery wears out. In addition, most upholstered furniture is sold in single pieces rather than in matched sets (such as bedroom suites). Because it is cheaper to replace a single piece than an entire set, replacement of single pieces tends to be more frequent than for sets.

The floor covering industry is both seasonal and cyclical. The first calendar quarter appears to be the weakest period for carpets, rugs, ceramic tile, and hardwood floors. Typically, floor sales decline the two


months subsequent to the holiday season, which is interesting considering strong marketing promotions for January “white sales” period on bedding, linens, and towels. An economic downturn such as the one we experienced negatively affects floor covering demand, as consumers and businesses delay these household improvements when they have lower confidence and income. The availability of credit and demand for housing also influence demand for all household durable goods products.

SURVEYING THE COMPETITIVE LANDSCAPE

Appliance manufacturers compete on product features, brand names, quality, performance, and price. Service, sales networks, warranties, advertising, and promotion are other key factors. Furniture manufacturers compete on product styling and quality, personal service, prompt delivery, price, and product and credit availability. Trademarks and brand awareness also can aid sales.

Industry concentration Makers of major home appliances in the US are highly concentrated. There are up to five main manufacturers of home laundry appliances, five dishwasher manufacturers, five makers of home refrigeration equipment, and 10 producers of room air conditioning equipment. As a result, large companies have few opportunities to expand by acquiring smaller ones. (See the discussion on barriers to entry and exit under the section entitled “Competitive factors: the Porter analysis.”)

In comparison to the manufacturing side of the business, the retail market for appliances is more fragmented, with a number of retailers selling major appliances. This space is dominated by a few large department stores, such as Sears, and by national retail chains, such as Best Buy Co. Inc., Home Depot Inc., Lowe’s Companies Inc., and Wal-Mart Stores Inc. The liquidation of Circuit City stores did not affect appliance makers since the company exited this product category a few years ago.

We think that, with competition squeezing profit margins and little differentiation among appliances, the number of appliance retailers and outlets is likely to decline over the long term, with larger chains gaining share from smaller firms. The larger and more national appliance retail chains produce greater sales volume than their smaller peers; this volume-generating capability serves as a significant advantage for the larger chains, since it gives them greater negotiating power with vendors and allows them to leverage their fixed costs better, thus maximizing profit margins. Many of the smaller firms have been successful by creating a new marketing strategy that is driven by kitchen remodeling and more upscale luxury brand appliances.

The US home furnishings industry is highly fragmented and competitive at both the retail and manufacturing levels. More than 1,000 companies are estimated to manufacture furniture of all types in the US. Unlike the appliance business, the home furnishings industry (comprising both manufacturers and retailers) is in the early stages of consolidation.

Domestic and foreign markets US appliance manufacturers have taken different approaches to entering the world’s less-developed regions. Whirlpool Corp., for example, has expanded internationally in areas where it believes growth opportunities are greatest. It aims to share engineering breakthroughs across regions, transfer best practices, and purchase raw materials and components economically and in large volumes to develop and maintain a competitive advantage. In contrast, Maytag believed it was most prudent to focus primarily on the US market. (Maytag suffered declining sales and was acquired by Whirlpool in 2006.) As in any industry, multinational companies face localized economic and political risk, as well as currency risks.

US home furnishings companies are domestically oriented. Foreign sales as a percentage of revenues remain in the low single digits. It will likely take at least a few more years of consolidation before the larger players increase their international efforts. In some cases, large Asian-based peers, particularly those in China, may acquire US furniture manufacturers.

Competitive factors: the Porter analysis In describing the competitive landscape of the appliance industry, we borrow the model developed by Michael E. Porter, a professor at Harvard University. Four factors are described below.


Barriers to entry and exit. Perhaps the most influential factor in keeping new appliance producers at bay is skimpy margins. At Whirlpool, for example, normalized net margins are in the low- to mid-single digits, the result of years of competition on essentially commodity products, which has driven down prices.

Whirlpool estimates that wholesale prices of products without technological innovation decline an average of 2%–3% per year. For a new participant that has not yet achieved economies of scale, the high fixed cost of production would make it difficult to compete profitably on such margins unless it achieved a major technological breakthrough.

High fixed costs also erect a barrier to exit for appliance makers. Manufacturing plants, even when shuttered, incur costs for maintenance, taxes, insurance, and environment-related expenses (i.e., safe disposal of wastes). Industry concentration has limited the number of companies that might be willing to buy divested production assets. The severity of the current US recession limited the number of global appliance makers interested in acquiring GE Appliances, and the parent company subsequently removed this business for sale. In our opinion, there may have been a wide price disparity in terms of what a willing buyer was prepared to pay compared with the asking price from GE Appliances.

Compared with the expense of shutting down operations, incremental costs of production are relatively low. This creates incentives for manufacturers to remain in operation and compete for profits rather than incur ongoing costs for shuttered plants. To spur volume and leverage operating efficiencies, participants reduce prices, keeping the industry price competitive and restricting its profit margins.

Furniture manufacturing, in contrast, enjoys relatively high single-digit net margins. Its primary entry barrier is the high cost of starting up operations. Incumbents that have paid off start-up expenses and established a high volume of production enjoy a significant cost-per-unit advantage, which discourages new participants from entering the furniture manufacturing market. Exiting the furniture manufacturing industry, however, is fairly easy. Given the fragmented nature of the business, opportunities exist to find a buyer of quality manufacturing capacity. However, the deepening recession has eliminated several potential purchases, with some furniture makers left only to permanently close down selected manufacturing facilities or disenfranchise from troubled furniture retailers.

Power of buyers. Appliance manufacturers’ biggest customers are major retailers such as Sears, Home Depot, Lowe’s, and Best Buy, which purchase a majority of their output. These retailers account for the majority of all appliances sold in the United States. The major retailers’ purchasing power gives them the leverage to negotiate preferential prices, which further narrows the manufacturers’ margins unless they can drive productivity improvements. In contrast, furniture retailers lack such negotiating power, due to their industry’s fragmentation although this is changing with retail concentration in bedding and low-end furniture categories. Wal-Mart, Ikea, Ethan Allen, American Signature, Target, Staples, Costco, and Sam’s Club were all in the top-25 category of US furniture and bedding retailers in 2013, according to the August 2013 issue of Furniture Today magazine.

Limited power of suppliers. Appliance and furniture manufacturers typically try to maintain their margins by reducing the amount they pay for raw materials and components. At present, suppliers are unable to fight back, because their goods are essentially commodities. This dynamic hurts suppliers but ensures low prices for customers—as long as cost pressures do not drive the suppliers out of business.

Availability of substitute products. In the appliance industry, the threat of substitute products comes largely from incremental improvements (such as energy-efficient washers and dryers or timed coffee makers), rather than from wholly new products that make previous products obsolete (such as the invention of the electric refrigerator, which replaced the icebox). Thus, participants can devote more R&D resources to improving existing products than to developing new product categories. Whirlpool and foreign appliance manufacturers, like LG Electronics and Samsung, have been innovative with integrating more electronics, including digital screens on their appliances for entertainment and utility features.

The situation with furniture is similar, though the industry is internally competitive and yields many product variations and styles. It is not likely that new products to replace beds, tables, and other furniture


will be invented. Occasionally, however, new needs arise and new products are created to meet them. For example, the spread of personal computers (PCs) into homes and the growth of home offices have spurred industry sales of desks and the development of other kinds of furniture designed to hold computer equipment and peripherals. The burgeoning growth of large flat-panel televisions has led to the redesign of entertainment cabinets to shapes and sizes that are bigger than the largest, outdated tube televisions.

Impact of foreign competition US furniture manufacturers tend to be domestically oriented. Foreign furniture makers have targeted the US market, however, and their market share has grown significantly in recent years, particularly through private label products sold to some of the largest US furniture retailers. The decline of the US dollar and the implementation of trade tariffs on Chinese furniture have done little to reduce the competitive pressure from foreign imports. US manufacturers continue to move more of their production overseas, where costs remain lower despite unfavorable currency exchange rates. In addition, foreign furniture makers have become better at turning out higher quality goods, reversing the long-held perception that foreign furniture—Asian furniture, in particular—was inferior to US furniture.

The high cost of shipping large appliances limits imports, as the expense makes it difficult to be price competitive. Thus, domestic companies such as General Electric Co. and Whirlpool Corp. (including Maytag) dominate the core US appliance market (refrigerators and freezers, electric and gas ranges, dishwashers, and clothes washers and dryers). Europe’s largest appliance manufacturer, AB Electrolux, also sells in the US market through its Frigidaire Home Products division. For smaller appliances, however, foreign competition is more intense: Asian companies are the top sellers of microwave ovens in the US.

In Western Europe, about 30 companies manufacture major home appliances; most, however, make a limited number of products for a specific geographic region. Significant merger and acquisition activity has occurred as manufacturers have sought to broaden product lines and expand geographic markets. This trend is likely to continue. European manufacturers compete on the same factors as US manufacturers, as well as on their ability to customize products to meet the specific needs of diverse consumer groups. In May 2014, IHS Technology, a global information company, reported that AB Electrolux (Sweden) is the world’s second largest home appliance maker (after Whirlpool, the US-based global number one home appliance manufacturer), and followed by BSH Bosch und Siemens Hausgeräte Co. (based in Germany).

In Asia, the major appliance market is characterized by rapid growth. About 50 firms make major home appliances, but the diversified industrial manufacturers like China’s Haier Group and South Korea’s Samsung and LG Electronics dominate by achieving economies of scale from their significant size and scope.

Competition is based on a wide variety of factors, including local production capabilities, product features, price, product quality, and performance. Competition among the 20 or so manufacturers of major appliances in Latin America is also based on a wide variety of factors, including product features, quality and performance, price, service, warranties, advertising, and promotion.

Pricing and margins Pricing in the appliance industry is very competitive, and the average price for undifferentiated appliances has declined in the past decade. When appliance prices do increase, they rarely cover rising costs. The major manufacturers often expend considerable resources to achieve small gains in market share.

The home furnishings industry has experienced pricing pressure, but not to the extent of the appliance industry. Consequently, furniture margins are higher than appliance margins. High-end products carry higher margins than low- and medium-priced appliances and furnishings. Thus, in 1986, Maytag’s margins eroded slightly when it purchased Magic Chef, a manufacturer of low- and medium-end appliances. Conversely, in the late 1980s, Whirlpool enjoyed margin expansion after its acquisition of Kitchen Aid, a producer of high-end products.

The principal methods of competition within the floor covering industry are service, style, quality, price and innovation of new products. We think price and market coverage, or scale, are important competitive


drivers. Advanced manufacturing technologies are also key cost drivers for carpet, ceramic tile and laminate and hardwood flooring products.

KEY INDUSTRY RATIOS AND STATISTICS

Housing starts. Released monthly by the US Census Bureau (CB) and the US Department of Housing and Urban Development (DHUD), housing starts indicate the number of new residences on which construction has begun in a given period. These residences ultimately will be filled with some combination of appliances and furniture. For any given month, the actual number is adjusted for seasonal factors, because housing starts vary significantly from month to month—diminishing, for example, in January, when bad weather can curtail building activity. Thus, the monthly housing start number is expressed as a seasonally adjusted annual rate (SAAR).

In 2013, housing starts (including single-family and multi-dwelling units) dropped 9.8% in December to a seasonally adjusted rate of 999,000. However, home-construction starts for 2013 hit 923,400—the highest annual total since 2007. In 2012, housing starts increased 28.0%, year over year, totaling 783,200 units, up from 610,000 units in 2011. The increase in 2012 followed increases of 4.5% in 2011 and 5.6% in 2010, and a 38.4% decline in 2009.

As of July 2014, Standard & Poor’s Economics (which operates separately from S&P Capital IQ) was projecting that housing starts would be around 1.1 mn in 2014, 1.4 mn in 2015, and 1.6 mn in 2016.

Interest rates. Interest rates are key macroeconomic indicators that influence the borrowing decisions of consumers. All other things being equal, one would expect healthier demand and better operating performance for household durables manufacturers in periods of falling or low interest rates. When long-term interest rates decline, housing activity generally increases, stimulating demand for household durables. Lower interest rates make housing more affordable for consumers that have adjustable rate mortgages (ARMs) large-ticket purchases like furniture and appliances more affordable when consumer financing is used.

Declining interest rates, however, are not always a positive sign for household durables companies. In a recession, interest rates may be low or declining, but the concomitant factors of low demand and a shrinking economy provide a very poor selling environment. At such times, the Federal Reserve might reduce interest rates to help boost economic growth, as it did in 2008, but under a deepening recession, interest rates may need to drop steeply before economic conditions start to improve.

The average yield on Treasury bills (a proxy for short-term interest rates) declined to 0.1% in 2010, where it remained throughout 2011, 2012, and 2013. The average yield was 0.2% in 2009, 1.4% in 2008, and 4.4% in 2007. As of July 2014, Standard & Poor’s Economics was projecting yields to average 0.1% in 2014. Its current outlook for 30-year government bonds (a rough proxy for mortgage rates) calls for an increase to 4.4% in 2014.

Real gross domestic product (GDP). GDP is the market value of all goods and services produced by labor and capital in the United States. Reported quarterly by the US Department of Commerce (DOC), it is the broadest measure of aggregate economic activity. Growth in the economy is measured by changes in inflation-adjusted (or real) GDP, which can be analyzed by examining the expenditure side of national income accounts.

To arrive at GDP, four major expenditure categories are totaled: consumption, investment, government purchases of goods and services, and net exports of goods and services. Consumption, or spending by domestic households on final goods and services, is the largest component of expenditures, accounting for approximately two-thirds of GDP. As such, changes in GDP are an excellent measure of the consumer’s economic health.

Real GDP decreased at an annual rate of 2.9% in the first quarter of 2014. In the fourth quarter of 2013, real GDP increased 2.6%. It grew 2.8% in 2012, up from 1.8% growth in 2011, but down from 3.0% growth in 2010, which followed a 2.6% decline in 2009. As of July 2014, Standard & Poor’s Economics


was forecasting that real GDP would grow 2.0% in 2014 (revised down from the 2.3% forecast in June), 3.1% in 2015, and 3.3% in 2016.

Disposable personal income. Reported each month by the Department of Commerce, disposable personal income is a measure of inflation-adjusted income, less personal tax and non-tax payments. It is an indicator of consumer spending potential.

When incomes are growing, consumers are more willing to spend. Conversely, when income levels are not increasing or are advancing at a lackluster pace, or when unemployment levels are rising, consumers tighten their spending. They might trade down to less expensive items, or postpone or forgo purchases, particularly in the case of big-ticket household durables.

Disposable personal income rose 3.9% in 2012 and 3.8% in 2011, following a 3.6% gain in 2010 and a 0.7% increase in 2009. As of August 1, 2014, disposable personal income in June increased 0.4% or $51.5 billion. As of January 2014, Standard & Poor’s Economics was projecting growth of 4.5% in 2014.

Consumer confidence. The most widely followed consumer confidence survey is conducted by the Conference Board, a private research organization, that polls 5,000 representative US households to gauge consumer sentiment. This measure of consumer attitudes is expressed as an index, with 1985 used as a base year (1985=100). Compiled from monthly telephone surveys to randomly selected individuals, the index has two components: the Present Situation Index and the Expectations Index.

A high level of consumer confidence signals that people generally feel good about the economy, their employment prospects or job security, and their future earnings ability. It usually is accompanied by increased spending and borrowing. Conversely, when consumers are uncertain about their economic future, they are likely to postpone some expenditures.

Consumer confidence, which hit an all-time low of 25.3 in February 2009, has improved notably since then. However, the ride was bumpy in 2011. In December 2012, the consumer confidence index declined to 66.7, and to an even lower 58.4 in January 2013. However, the index recovered to 78.1 in December 2013, up

CHART H03: CONSUMER FURNITURE DEMAND & DISPOSABLE INCOME

Chart H02: CONSUMER CONFIDENCE VS. FURNITURE & APPLIANCE STORE SALES

0

20

40

60

80

100

120

140

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Disposable personal income (left scale)

Consumer furniture demand (right scale)

CONSUMER FURNITURE DEMAND & DISPOSABLE INCOME (In billions of dollars)

Source: US Bureau of Economic Analysis.

6

8

10

12

14

16

18

20

22

25

40

55

70

85

100

115

130

145

2000 2002 2004 2006 2008 2010 2012 ʬ2014

CONSUMER CONFIDENCE VS. FURNITURE & APPLIANCE STORE SALES

Consumer confidence index, 1985=100 (left scale)

Furniture & appliance store sales* in billions of dollars (right scale)

*Does not include sales of furniture and appliances at discount, department, or general merchandise stores. ʬ Consumer Confidence Index data through June, Furniture and appliance store sales through May.Sources: The Conference Board; US Department of Commerce.


from 72.0 in November. The Present Situation Index increased to 76.2 in December 2013 from 73.5 in November, while the Expectations Index increased to 79.4 from 71.1.

The Conference Board said, “Consumer confidence rebounded in December 2013 to 77.5 and was close to pre-government shutdown levels (September 2013, 80.2). In January 2014, the index rose to 80.7 (1985=100). According to the Conference Board, “Consumer confidence advanced in January for the second consecutive month. Consumers’ assessment of the situation continued to improve, with both business conditions and the job market rated more favorably. As more jobs surged the market in May 2014, the CCI jumped three points to 85.2 in June, the highest reading since January 2008. Standard & Poor’s Economics thinks that although labor market conditions have improved slightly, consumers remain concerned about their jobs and their income.

Overall, confidence appears to be back on track and rising expectations suggest the economy may pick up some momentum in the months ahead. Given the slight improvement in the employment situation, consumers’ appraisal of the labor market was also more positive. These improvements notwithstanding, consumers continue to grapple with slow growth in income levels, which are hindering their purchasing power.

HOW TO ANALYZE A HOUSEHOLD DURABLES COMPANY

When examining a household durables manufacturer, analysts typically begin by assessing general industry prospects and relevant macroeconomic factors. This overview provides a framework for evaluating individual companies. To identify the strengths, weaknesses, and potential future performance of an individual firm, company-specific qualitative and quantitative factors (outlined in further detail below) should be examined and compared with those of competing firms. The analyst may decide to emphasize certain measures more than others, depending on company- and industry-specific factors.

For instance, major appliances that are used every day are considered less discretionary than furniture, so a company that sells only refrigerators may have less downside risk than a company that sells furniture. Financial policies matter as well: a firm that carries a high level of debt, particularly at a floating rate, may be more susceptible to changes in interest rates than another firm with a lower net debt ratio. In addition, high debt payment obligations lead to greater strain on liquidity for companies that experience lower funds from operations during economic downturns.

QUALITATIVE FACTORS

Business strategy and leadership, and the company’s competition are some of the factors that an analyst should review.

Business strategy and leadership Arguably, the most important qualitative factors pertain to strategy and leadership. Does the company have a coherent, focused business strategy? Does its management possess the depth of experience and the leadership ability to carry out that strategy? If a company is clear about its goals, the direction in which management wants to lead the company should be obvious. Moreover, if investors not only understand, but also believe in, the soundness of the firm’s strategy, the value of the firm’s shares often will appreciate.

A firm’s management should quantify its goals so analysts can track how well it meets its performance objectives. Analysts should audit management’s performance by comparing stated goals with actual practice. For example, if a company announces a new business strategy of investing more money in research to develop innovative products, then research and development (R&D) expenses would be expected to increase as a percentage of sales. If they do, the analyst should examine whether or not the new products are indeed innovative and capable of generating higher revenue growth.

Management experience in the industry and its track record are also important success factors. Top management’s background is discussed in the 10-K report, a document that companies are required to submit annually to the Securities and Exchange Commission (SEC). In addition, it is helpful to examine the


composition of a company’s board of directors; the proxy statement carries short descriptions of board members’ backgrounds. With this information, determine if the board’s members are business leaders with diverse, relevant experience who possess the ability to oversee a complex enterprise.

Corporate governance is also becoming an increasingly important topic, as it is a measure of a corporation’s transparency, accountability, and fairness to shareholders. A review of the company’s proxy statement can provide investors with information on important corporate governance topics, such as board composition, voting rights, related-party transactions, and management compensation.

The competition Analysts should also compare a company’s fundamental attributes with those of its competitors. How do the companies’ managements, business plans, products, and financial resources compare? Do they serve the same population, economic segment, or geographic market? Whose markets seem most promising? Is the company, or its competitors, investing in emerging regions, such as Latin America, Eastern Europe, and Asia? If so, how are they going about it: through joint ventures or through “greenfield” operations (i.e., building new plants on vacant land)?

Are the company’s labor and employee turnover rates similar to those of its competitors? Whose operations are run most efficiently? The low-cost producer will have greater flexibility to lower prices during economic slumps, helping it gain market share. Trends support manufacturing outside the US to gain a low-cost advantage or to maintain margins. Most of these issues reflect factors that management can control. They are thus useful in assessing how well the company is being run.

QUANTITATIVE FACTORS

Assessment of a company’s past results and of its potential future performance would be incomplete without a careful analysis of financial statements. Growth trends over time should be noted. A company’s financial ratios and statistics (including those listed below) should be compared with its competitors’. If the company’s results differ significantly, the reasons for that divergence should be examined.

Market share Growth in market share indicates that a company may have scale advantages in manufacturing, distribution, and marketing versus its peers. It may also suggest that a company has accurately assessed demand and is distributing products effectively, and that the market is responding positively to those products. If a company is able to expand its market share, this also means that the company is growing faster than its industry, and could be an indication that the company is outperforming its peers. One caveat, however, is that gains in market share can also be achieved through extreme price-cutting or product dumping, both of which harm profitability.

Gross margin The gross profit margin is a measure of a manufacturing operation’s efficiency and profitability. Well-run and profitable companies can sell their goods well above the cost of production, if pricing remains stable. It is important to observe whether margins are widening, narrowing, or holding steady, and to discern the reasons behind those trends.

For example, the gross margin could be narrowing because the company cannot raise or maintain prices as much as it would like for its products. Possible reasons are that the products have become commodities, or are facing stronger competition or substitute products. On a broader scale, the products’ markets could be saturated, consumers could be tapped out, or the economy could be in a downturn.

Another explanation is possible for gross margin contraction. Has the company recently added another plant that has not yet reached full production, and whose fixed costs are not being fully absorbed? If so, it may mean that such a plant is not being used efficiently; this could hurt profitability over the short term but improve profitability over the longer term as plant utilization rates increase.


One company’s gross margin can be superior to another’s for several reasons. The company may have better buying power through greater scale (which reduces raw materials costs), or be more innovative, with higher-margin products. It may run plants more efficiently, own facilities in lower-wage regions, or sell to underserved, high-growth markets that allow more pricing flexibility. Therefore, calculating a company’s gross margin is just the beginning of a profitability analysis—a logical place to begin asking more in-depth questions.

Operating margin Like gross margins, operating margins help to illustrate a company’s efficiency and profitability, although on a broader scope. The operating margin reflects the efficiency and profitability of an entire enterprise—not just manufacturing, but corporate, selling, and distribution operations as well. For example, a company with lean management, lower fixed costs, and well-run distribution centers should report wider operating margins than one with a bloated bureaucracy and duplicative distribution centers.

An analyst should be aware that some companies may hide normal operating expenses or disguise poor decisions as write-offs, thus boosting the reported operating margin. If significant “special items” such as asset impairment charges or goodwill write-downs crop up every year, it’s a red flag. In such cases, the analyst may want to add special items back to operating expenses. What this essentially does is reduce the reported operating margin to something more useful and realistic, so that comparisons can be made with the company’s past results and with those of its peers.

Particularly in times of restructuring and consolidation, some companies separate unusual one-time expense items, such as a restructuring charge for closing plants and making severance payments. Removing such costs from the operating expense total makes a company’s financial statements comparable on an apples-to-apples or an operating basis. This makes sense because the analyst wants to know what the company is going to look like going forward.

Same-store sales Some furniture manufacturers have significant single network retail operations. For such firms, sales gains measure their success with customers. The most closely watched quantitative indicator for retail operations is comparable-store, or same-store sales. These tally year-to-year growth in sales at stores that have been open at least one year.

Viewed alone, total sales can be misleading. A company that aggressively opens new units can generate strong overall sales gains while experiencing declines at older outlets. Same-store sales are a better barometer of year-over-year changes in demand, because the figure excludes growth from newly opened stores. A review of same-store sales should also take into account seasonal shopping patterns and economic conditions. Similarly, it is important to look at underlying sales trends and make adjustments for companies that have disposed of significant assets so that year-over-year comparisons are consistent.

Asset utilization and profitability measures One of the best ways to evaluate management is to assess the returns achieved on company resources. Common measures are return on assets (ROA), return on equity (ROE), and growth in net earnings per share, as described in further detail in this section. Managements try to achieve maximum profits by using the fewest assets possible. There are limits, however, to how far they can go. For example, if a company reduces its investment in its plants, those plants may become outdated, inefficient, or too small to satisfy a growing market, which would hinder sales and profits over the long term. Similarly, aggressive plans to limit receivables growth, by being too tight with customer credit, can crimp sales growth. Finally, if inventory levels are kept too low, insufficient product availability will hurt sales.

Return on assets (ROA). This financial metric reflects a company’s profitability as well as its efficiency in using its working capital (such as its inventory and receivables), and long-term assets (such as property, plant, and equipment). ROA is calculated by dividing net income from a given time period by the average total assets for the same period. Companies that use their assets efficiently and have wider profit margins than their competitors will achieve higher ROAs than those with less optimal configurations. In evaluating a company, analysts look at trends in the company’s own performance, as well as how those trends compare with other companies in the same industry. ROA and operating margins do not indicate whether the company


has struck a good balance between debt and equity financing. Operating profits and margins are calculated before interest expense, and ROA measures returns on assets without regard to leverage (debt financing).

Return on equity (ROE). ROE is the net income during a period divided by the average value of common equity during that period. It lets the analyst evaluate a company’s profitability and asset utilization, and how efficiently its managers are using capital resources. Two companies could have identical ROAs, but if one uses debt financing more aggressively, it will have the superior ROE.

Earnings per share (EPS). All other things being equal, companies that consistently achieve above-average growth in EPS (compared with their peers) are generally rewarded with higher valuations (such as richer price/earnings, price/book, price/sales, and price/cash flow multiples). Sustainable EPS growth reflects an ability to manage a company’s profitability in both up cycles and down cycles.

EQUITY VALUATION

Household durables stocks generally tend to be somewhat volatile, partly reflecting the underlying cyclicality of the industry. S&P Capital IQ (S&P) thinks that prospects for future profit growth are paramount in determining a company’s worth. Common valuation measurements include multiples of EPS and cash flow. Keep in mind that valuations depend on various factors, including overall investor sentiment, industry and economic conditions, the level of interest rates, and the extent to which future earnings seem predictable. As is the case with other measures, valuations of a particular company should be compared with those of similar companies in the same industry. An analyst should also examine a company’s or industry’s historical valuations relative to a benchmark price-to-earnings ratio.

For the household durables industry, wide swings in the valuation ratios can occur over the business cycle. The sector’s earnings are affected by changing economic conditions, as well as by investor sentiment, as the sector goes into and out of favor with investors.

Caution must be exercised in the interpretation of these metrics. A company that appears cheap relative to its peers, for example, may be at certain competitive disadvantages, such as a relative lack of attractive restaurant concepts, higher debt levels, or lower profit margins, to name a few reasons. As a result, other investors may place a lower valuation on the shares of such a company.

It is also important to take into account how management is performing and how well it is using the company’s capital, such as by examining the profitability on various assets, as discussed earlier in this section. A change in management can lead to an increase in the value of a company’s stock if investors perceive that steps will be taken to produce higher returns.

Price-to-earnings (P/E) ratio. The most common means of valuing equities is the P/E ratio, calculated as the share price divided by net earnings per share (EPS) for either the past 12 months or projected EPS for a specified future period.

Enterprise value to EBITDA. As an alternative to the standard P/E ratio, to eliminate distortions caused by differing tax rates and leverage, and to better evaluate a company’s operating performance, analysts compare the company’s enterprise value (EV; a combination of net debt and stock market value) to its earnings before interest, taxes, depreciation, and amortization (EBITDA).


GLOSSARY

Baby Boomers—The post-World War II generation, born between 1946 and 1964, according to the US Census Bureau (CB).

Case goods—Generally refers to furniture made of hard materials, such as wood, metal, glass or plastic. Examples of case goods include chests, dressers, bookshelves, and cabinets. (See Upholstery.)

Discount retailer—Also known as “general retailers,” these high-traffic stores sell a wide variety of quick-turning items, typically at rock-bottom prices. Major product categories include apparel and accessories, furniture and home furnishings, sporting goods, small appliances and electronics, hardware and automotive supplies, lawn and garden equipment, and seasonal items. Among the largest discount chains in the US are Wal-Mart Stores Inc., Target Corp., Costco, and Kmart (a division of Sears Holdings). (See Specialty retailer.)

Durable goods—In economics, a durable good (or hard good) is a product that does not quickly wear out or, more specifically, one that yields utility over time rather than being completely consumed in one use. Examples of consumer durable goods include cars and such household goods as home appliances, consumer electronics, furniture, etc. In contrast, nondurable goods (also known as soft goods or consumables) are products that either are consumed in one use or have a lifespan of less than three years.

Echo Boomers—Also known as Generation Y (the demographic cohort following Generation X) or Millennials, Echo Boomers are those born from the late 1970s or early 1980s through the late 1990s or early 2000s, though there are no precise dates for when the Millennial generation starts and ends.

Emerging markets—Nations with social or business activity in the process of rapid growth and industrialization; such countries are considered to be in a transitional phase between developing and developed status. The nations included vary by source and can change over time. As of March 29, 2013, Standard & Poor’s Emerging Broad Market Index (BMI) included the following countries: in Europe, the Czech Republic, Hungary, Poland, Russia, and Turkey; in Asia-Pacific, China, India, Indonesia, Malaysia, the Philippines, Taiwan, and Thailand; in Latin America: Brazil, Chile, Colombia, Mexico, and Peru; and in the Middle East & Africa: Egypt, Morocco, and South Africa.

Energy Star—An international standard for energy-efficient products that originated in the US. The label identifies major electrical appliances and other products that meet or exceed US Environmental Protection Agency (EPA) guidelines for energy efficiency (generally, they use 20%–30% less energy than required by federal standards).

Existing home sales—The number of previously owned homes that are sold in a given period.

Household formations—The number of new households formed in a population during a given period, usually a calendar year.

Housing starts—The number of housing units on which construction has begun during a given time period. Construction is considered to start when excavation begins on a building’s foundation. Reported monthly, housing starts are usually expressed at a seasonally adjusted annual rate (SAAR).

Same-store sales—The measure of year-on-year sales growth or decline for a store or chain of stores; also called comparable-store sales. Same-store sales results exclude new and closed stores, which can skew results.

Single-family home—Residential structure containing one housing unit (i.e., a traditional home). A multifamily home, in contrast, is a residential structure that contains more than one housing unit.

Smart appliance—An appliance that operates when electricity is the cheapest and most abundant; the appliance determines this by communicating with the electric meter.

Specialty retailer—Stores selling either a single category of merchandise or a few closely related categories, such as home-related items (i.e., kitchen and bath ware). The major specialty product categories include furniture and appliances. (See Discount retailer.)

Upholstery—A category of furniture (usually seating) that has padding, springs, webbing, and fabric or leather covers. Four elements are common to most upholstered items: the frame (usually wood), support system (solid, tension, or spring), cushioning (cushions and padding), and covering (fabrics and leathers). (See Case goods.)


INDUSTRY REFERENCES

PERIODICALS

Appliance http://www.appliancemagazine.com Monthly; covers appliance technology, industry trends, news, and new products, with an emphasis on accelerated design strategies.

Builder http://www.builderonline.com Monthly; covers the US homebuilding industry.

The Conference Board/ NFO’s Consumer Confidence Survey http://www.conference-board.org Monthly; reports consumer confidence levels.

Furniture Today http://www.furnituretoday.com Weekly; covers furniture industry conferences, manufacturing, retail company strategies and results, and product trends.

HFN (Home Furnishings News) http://www.hfnmag.com Weekly newspaper for home furnishings retailers; covers furniture, textiles, housewares, and consumer electronics.

TWICE (This Week in Consumer Electronics) http://www.twice.com Biweekly; covers the consumer electronics and appliance industries.

US Housing Market Conditions http://www.huduser.org/periodicals/ushmc.html Quarterly; covers current trends and statistics in the housing market, and features historical data.

MARKET RESEARCH

Pew Research Center http://pewresearch.org Market intelligence firm providing information, content analysis, and empirical social science research services.

TRADE ASSOCIATIONS

American Home Furnishings Alliance (AHFA) http://www.ahfa.us Industry trade group; collects and disseminates data, and provides economic forecasts on the home furnishings industry.

Association of Home Appliance Manufacturers (AHAM) http://www.aham.org Industry trade group; collects and disseminates data, and provides economic forecasts on the household appliance industry.

International Sleep Products Association (ISPA) http://www.sleepproducts.org Represents the full bedding industry on commercial, health, safety and environmental issues, and serves to provide a positive image for the sleep products industry.

National Association of the Remodeling Industry http://www.nari.org Home remodeling industry group with 8,200 member companies; promotes good faith and fair contracts in products and services for home remodeling.

GOVERNMENT AGENCIES

Bureau of Economic Analysis (BEA) http://www.bea.gov Federal agency that collects economic data.

US Census Bureau (CB) http://www.census.gov Federal agency that collects US population data.

US Department of Commerce http://www.commerce.gov Cabinet-level department responsible for a variety of government agencies that monitor and regulate US commerce.


COMPARATIVE COMPANY ANALYSIS

Operating Revenues

Million $ CAGR (%) Index Basis (2003 = 100)

Ticker Company Yr. End 2013 2012 2011 2010 2009 2008 2003 10-Yr. 5-Yr. 1-Yr. 2013 2012 2011 2010 2009

HOME FURNISHINGS‡ETH § ETHAN ALLEN INTERIORS INC JUN 729.1 729.4 679.0 A 590.1 A 674.3 A 980.0 A 907.3 (2.2) (5.7) (0.0) 80 80 75 65 74LZB § LA-Z-BOY INC # APR 1,357.3 D 1,332.5 1,231.7 1,187.1 1,179.2 1,226.7 1,998.9 C (3.8) 2.0 1.9 68 67 62 59 59LEG [] LEGGETT & PLATT INC DEC 3,746.0 D 3,720.8 3,636.0 3,359.1 3,055.1 D 4,076.1 D 4,388.2 A (1.6) (1.7) 0.7 85 85 83 77 70MHK [] MOHAWK INDUSTRIES INC DEC 7,348.8 A,C 5,788.0 5,642.3 5,319.1 5,344.0 6,826.3 5,005.1 A 3.9 1.5 27.0 147 116 113 106 107TPX † TEMPUR SEALY INTL INC DEC 2,464.3 A 1,402.9 A 1,417.9 1,105.4 831.2 927.8 479.1 17.8 21.6 75.7 514 293 296 231 173

HOUSEHOLD APPLIANCES‡HELE § HELEN OF TROY LTD # FEB 1,317.2 1,288.3 1,181.7 A 777.0 A 647.6 A 622.7 A 474.9 C,D 10.7 16.2 2.2 277 271 249 164 136IRBT § IROBOT CORP DEC 487.4 436.2 A 465.5 401.0 298.6 307.6 54.3 24.5 9.6 11.7 897 803 857 738 550WHR [] WHIRLPOOL CORP DEC 18,769.0 18,143.0 18,666.0 18,366.0 17,099.0 18,907.0 12,176.0 4.4 (0.1) 3.5 154 149 153 151 140

OTHER COMPANIES WITH SIGNIFICANT HOUSEHOLD DURABLES OPERATIONSKNL KNOLL INC DEC 862.7 887.5 A 922.2 809.5 780.0 1,120.1 697.2 2.2 (5.1) (2.8) 124 127 132 116 112ZZ SEALY CORP NOV NA 1,347.9 A 1,230.2 1,219.5 D 1,290.1 1,498.0 1,189.9 NA NA NA NA 113 103 102 108SCSS § SELECT COMFORT CORP DEC 960.2 935.0 743.2 605.7 544.2 608.5 458.5 7.7 9.6 2.7 209 204 162 132 119

Note: Data as originally reported. CAGR-Compound annual grow th rate. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the follow ing calendar year. **Not calculated; data for base year or end year not available. A - This year's data reflect an acquisition or merger. B - This year's data reflect a major merger resulting in the formation of a new company. C - This year's data reflect an accounting change. D - Data exclude discontinued operations. E - Includes excise taxes. F - Includes other (nonoperating) income. G - Includes sale of leased depts. H - Some or all data are not available, due to a f iscal year change.

Net Income

Million $ CAGR (%) Index Basis (2003 = 100)

Ticker Company Yr. End 2013 2012 2011 2010 2009 2008 2003 10-Yr. 5-Yr. 1-Yr. 2013 2012 2011 2010 2009

HOME FURNISHINGS‡ETH § ETHAN ALLEN INTERIORS INC JUN 32.5 49.7 29.3 (44.3) (52.7) 58.1 75.4 (8.1) (11.0) (34.6) 43 66 39 (59) (70)LZB § LA-Z-BOY INC # APR 58.9 46.4 88.0 24.0 32.5 (121.3) 2.5 37.0 NM 26.9 2,328 1,835 3,480 951 1,287LEG [] LEGGETT & PLATT INC DEC 190.4 245.8 153.3 177.4 117.9 122.9 205.9 (0.8) 9.1 (22.5) 92 119 74 86 57MHK [] MOHAWK INDUSTRIES INC DEC 366.7 250.3 173.9 185.5 (5.5) (1,458.2) 310.1 1.7 NM 46.5 118 81 56 60 (2)TPX † TEMPUR SEALY INTL INC DEC 78.6 106.8 219.6 157.1 85.0 58.9 37.6 7.7 6.0 (26.4) 209 284 584 418 226

HOUSEHOLD APPLIANCES‡HELE § HELEN OF TROY LTD # FEB 86.2 115.7 110.4 93.3 71.8 (56.8) 71.6 1.9 NM (25.4) 121 162 154 130 100IRBT § IROBOT CORP DEC 27.6 17.3 40.2 25.5 3.3 0.8 (7.4) NM 105.4 59.8 NM NM NM NM NMWHR [] WHIRLPOOL CORP DEC 827.0 401.0 390.0 619.0 328.0 418.0 414.0 7.2 14.6 106.2 200 97 94 150 79

OTHER COMPANIES WITH SIGNIFICANT HOUSEHOLD DURABLES OPERATIONSKNL KNOLL INC DEC 23.1 50.0 58.0 28.0 27.4 84.9 36.3 (4.4) (22.9) (53.7) 64 138 160 77 75ZZ SEALY CORP NOV NA 2.0 (5.7) 24.7 13.5 (2.9) 18.3 NA NA NA ** 11 (31) 135 74SCSS § SELECT COMFORT CORP DEC 60.1 78.1 60.5 31.6 35.6 (70.2) 27.2 8.3 NM (23.1) 221 287 223 116 131

Note: Data as originally reported. CAGR-Compound annual grow th rate. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the follow ing calendar year. **Not calculated; data for base year or end year not available.


Return on Revenues (%) Return on Assets (%) Return on Equity (%)

Ticker Company Yr. End 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009

HOME FURNISHINGS‡ETH § ETHAN ALLEN INTERIORS INC JUN 4.5 6.8 4.3 NM NM 5.1 7.8 4.6 NM NM 9.9 16.5 10.8 NM NMLZB § LA-Z-BOY INC # APR 4.3 3.5 7.1 2.0 2.8 7.9 6.6 13.8 4.0 5.6 11.7 10.0 21.9 6.8 10.0LEG [] LEGGETT & PLATT INC DEC 5.1 6.6 4.2 5.3 3.9 6.0 8.0 5.2 5.9 3.8 13.5 18.0 10.9 11.6 7.4MHK [] MOHAWK INDUSTRIES INC DEC 5.0 4.3 3.1 3.5 NM 5.0 4.0 2.8 3.0 NM 9.0 7.0 5.2 5.7 NMTPX † TEMPUR SEALY INTL INC DEC 3.2 7.6 15.5 14.2 10.2 3.9 10.0 28.4 23.1 13.2 111.6 402.3 280.1 105.4 69.5

HOUSEHOLD APPLIANCES‡HELE § HELEN OF TROY LTD # FEB 6.5 9.0 9.3 12.0 11.1 5.7 8.0 8.2 9.0 8.7 8.8 13.4 14.9 14.7 13.1IRBT § IROBOT CORP DEC 5.7 4.0 8.6 6.4 1.1 7.2 5.0 13.7 11.2 1.8 9.1 6.7 19.2 16.6 2.6WHR [] WHIRLPOOL CORP DEC 4.4 2.2 2.1 3.4 1.9 5.3 2.6 2.5 4.0 2.3 18.0 9.5 9.3 15.7 9.8

OTHER COMPANIES WITH SIGNIFICANT HOUSEHOLD DURABLES OPERATIONSKNL KNOLL INC DEC 2.7 5.6 6.3 3.5 3.5 3.4 7.2 8.4 4.2 4.0 11.1 28.3 39.8 26.0 40.8ZZ SEALY CORP NOV NA 0.1 NM 2.0 1.0 NA 0.2 NM 2.5 1.4 NA NA NA NA NA SCSS § SELECT COMFORT CORP DEC 6.3 8.4 8.1 5.2 6.5 16.6 25.8 28.0 21.9 28.0 28.7 48.3 64.6 78.5 NA

Note: Data as originally reported. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the follow ing calendar year.

Debt as a % ofCurrent Ratio Debt / Capital Ratio (%) Net Working Capital


HOME FURNISHINGS‡ETH § ETHAN ALLEN INTERIORS INC JUN 2.0 1.9 1.7 1.8 2.2 28.1 32.4 36.3 42.7 39.9 102.5 117.1 144.9 175.0 145.9LZB § LA-Z-BOY INC # APR 3.1 3.3 3.3 3.3 2.9 0.1 1.5 1.8 7.7 12.1 0.1 2.2 2.3 10.0 16.7LEG [] LEGGETT & PLATT INC DEC 1.5 1.8 2.1 2.3 2.3 32.1 36.2 38.1 32.6 33.0 152.2 140.4 130.6 109.5 116.3MHK [] MOHAWK INDUSTRIES INC DEC 2.3 3.1 2.2 2.1 2.7 30.3 24.7 24.0 26.3 33.5 120.8 77.1 92.5 108.6 122.1TPX † TEMPUR SEALY INTL INC DEC 1.6 3.9 2.1 1.9 1.5 81.2 95.0 91.4 72.0 59.5 628.3 168.3 298.0 325.0 410.5

HOUSEHOLD APPLIANCES‡HELE § HELEN OF TROY LTD # FEB 1.9 1.8 1.3 1.4 3.4 8.1 13.6 17.0 20.1 18.3 33.4 65.5 159.6 146.5 51.6IRBT § IROBOT CORP DEC 3.7 3.1 3.3 2.7 2.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0WHR [] WHIRLPOOL CORP DEC 1.0 1.0 1.0 1.2 1.2 27.3 31.3 33.7 34.2 40.6 809.6 613.2 NM 188.3 230.8

OTHER COMPANIES WITH SIGNIFICANT HOUSEHOLD DURABLES OPERATIONSKNL KNOLL INC DEC 1.4 1.5 1.4 1.4 1.4 36.3 44.6 49.6 57.7 70.0 254.8 233.7 259.3 353.8 487.0ZZ SEALY CORP NOV NA 1.8 2.2 2.0 1.7 NA 106.5 111.3 112.3 114.7 NA 425.0 425.8 470.0 530.6SCSS § SELECT COMFORT CORP DEC 1.4 1.6 1.6 1.2 0.7 0.0 0.0 0.1 0.5 1.2 0.0 0.0 0.1 1.5 NM



Price / Earnings Ratio (High-Low) Dividend Payout Ratio (%) Dividend Yield (High-Low, %)

Ticker Company Yr. End 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009

HOME FURNISHINGS‡ETH § ETHAN ALLEN INTERIORS INC JUN 30 - 21 18 - 10 25 - 12 NM- NM NM- NM 68 16 20 NM NM 3.2 - 2.3 1.6 - 0.9 1.6 - 0.8 1.6 - 0.8 11.7 - 4.7LZB § LA-Z-BOY INC # APR 28 - 13 20 - 13 8 - 4 34 - 14 18 - 1 18 9 0 0 0 1.4 - 0.6 0.7 - 0.5 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0LEG [] LEGGETT & PLATT INC DEC 26 - 21 16 - 11 26 - 17 21 - 15 29 - 14 90 67 105 91 138 4.3 - 3.4 5.9 - 4.1 6.2 - 4.1 5.9 - 4.2 10.2 - 4.8MHK [] MOHAWK INDUSTRIES INC DEC 29 - 18 26 - 16 27 - 16 25 - 16 NM- NM 0 0 0 0 NM 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0TPX † TEMPUR SEALY INTL INC DEC 42 - 25 50 - 12 23 - 12 18 - 11 22 - 3 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0

HOUSEHOLD APPLIANCES‡HELE § HELEN OF TROY LTD # FEB 19 - 12 10 - 8 10 - 7 10 - 7 11 - 4 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0IRBT § IROBOT CORP DEC 42 - 20 61 - 26 26 - 15 25 - 14 NM- 54 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0WHR [] WHIRLPOOL CORP DEC 15 - 10 20 - 9 18 - 9 15 - 9 19 - 4 23 39 38 21 39 2.3 - 1.5 4.2 - 1.9 4.3 - 2.1 2.4 - 1.5 9.0 - 2.0

OTHER COMPANIES WITH SIGNIFICANT HOUSEHOLD DURABLES OPERATIONSKNL KNOLL INC DEC 38 - 27 16 - 11 18 - 10 29 - 16 18 - 9 98 41 29 20 30 3.6 - 2.6 3.7 - 2.5 2.9 - 1.6 1.2 - 0.7 3.4 - 1.6ZZ SEALY CORP NOV NA - NA NM- 69 NM- NM 16 - 9 39 - 3 NA 0 NM 0 0 NA - NA 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0SCSS § SELECT COMFORT CORP DEC 26 - 15 25 - 13 20 - 8 21 - 8 9 - 0 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0


20092013 2012 2011 2010

Earnings per Share ($) Tangible Book Value per Share ($) Share Price (High-Low, $)


HOME FURNISHINGS‡ETH § ETHAN ALLEN INTERIORS INC JUN 1.13 1.72 1.02 (1.53) (1.83) 10.00 9.59 8.22 7.37 9.01 33.36 - 23.88 30.29 - 18.00 25.37 - 12.30 25.40 - 12.35 17.62 - 6.98LZB § LA-Z-BOY INC # APR 1.11 0.87 1.66 0.46 0.63 9.68 8.92 8.40 6.90 6.55 31.05 - 14.54 17.13 - 10.95 13.85 - 6.76 15.46 - 6.44 11.07 - 0.53LEG [] LEGGETT & PLATT INC DEC 1.31 1.70 1.05 1.17 0.74 1.90 1.70 1.89 2.99 3.16 34.28 - 27.25 27.89 - 19.26 26.95 - 17.80 25.15 - 17.89 21.44 - 10.03MHK [] MOHAWK INDUSTRIES INC DEC 5.11 3.63 2.53 2.66 (0.08) 26.32 25.74 20.87 17.85 14.67 149.01 - 91.30 93.95 - 57.62 68.86 - 39.93 66.93 - 41.33 53.71 - 16.97TPX † TEMPUR SEALY INTL INC DEC 1.30 1.74 3.27 2.23 1.13 (22.96) (4.30) (3.90) (2.27) (1.14) 54.38 - 32.11 87.43 - 20.70 74.81 - 38.88 41.17 - 23.50 24.43 - 3.84

HOUSEHOLD APPLIANCES‡HELE § HELEN OF TROY LTD # FEB 2.69 3.64 3.52 3.04 2.38 7.87 3.69 (1.03) 0.80 7.22 49.79 - 32.34 35.35 - 28.02 36.75 - 23.83 30.46 - 21.00 25.01 - 8.55IRBT § IROBOT CORP DEC 0.97 0.63 1.50 1.00 0.13 8.96 7.15 8.55 6.33 4.84 41.12 - 19.18 38.33 - 16.25 39.00 - 22.46 25.27 - 14.45 17.85 - 7.00WHR [] WHIRLPOOL CORP DEC 10.42 5.14 5.07 8.12 4.39 19.45 10.27 9.17 9.29 1.85 159.22 - 101.74 104.21 - 47.72 92.28 - 45.22 118.44 - 71.00 85.01 - 19.19

OTHER COMPANIES WITH SIGNIFICANT HOUSEHOLD DURABLES OPERATIONSKNL KNOLL INC DEC 0.49 1.07 1.25 0.61 0.60 (1.41) (2.40) (2.74) (3.63) (4.42) 18.69 - 13.46 17.52 - 11.96 22.73 - 12.59 17.45 - 9.95 11.00 - 5.33ZZ SEALY CORP NOV NA 0.02 (0.06) 0.26 0.15 NA (4.17) (4.39) (4.62) (4.98) NA - NA 2.45 - 1.37 3.06 - 1.09 4.24 - 2.30 5.83 - 0.43SCSS § SELECT COMFORT CORP DEC 1.10 1.41 1.10 0.58 0.78 3.80 3.41 2.24 0.99 0.36 28.94 - 16.62 35.60 - 19.00 22.19 - 9.22 12.06 - 4.92 7.01 - 0.20

Note: Data as originally reported. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the follow ing calendar year. J-This amount includes intangibles that cannot be identif ied.

The analysis and opinion set forth in this publication are provided by S&P Capital IQ Equity Research and are prepared separately from any other analytic activity of Standard & Poor’s.

In this regard, S&P Capital IQ Equity Research has no access to nonpublic information received by other units of Standard & Poor’s.

The accuracy and completeness of information obtained from third-party sources, and the opinions based on such information, are not guaranteed.


General Disclaimers S&P Capital IQ’s Industry Surveys Reports (the “Industry Surveys”) have been prepared and issued by S&P Capital IQ and/or one of its affiliates. In the United States and United Kingdom, the Industry Surveys are prepared and issued by Standard & Poor’s Financial Services LLC; in Hong Kong, by Standard & Poor’s Investment Advisory Services (HK) Limited, which is regulated by the Hong Kong Securities Futures Commission; in Singapore, by McGraw Hill Financial Singapore Pte. Limited, which is regulated by the Monetary Authority of Singapore; in Malaysia, by Standard & Poor’s Malaysia Sdn Bhd, which is regulated by the Securities Commission of Malaysia; in Australia, by Standard & Poor’s Information Services (Australia) Pty Ltd, which is regulated by the Australian Securities & Investments Commission; and in Japan, by McGraw Hill Financial Japan KK, which is registered by Kanto Financial Bureau. No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages. Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisers and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment adviser except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process. S&P provides a wide range of services to, or relating to, many organizations, including issuers or underwriters of securities or obligors, investment advisers, broker-dealers, investment banks, other financial institutions and financial intermediaries. As a result, S&P may receive fees or other economic benefits from organizations whose securities or services it may recommend, analyze, rate, include in model portfolios, evaluate, price or otherwise address. The Industry Surveys are not intended to be investment advice and do not constitute any form of invitation or inducement by S&P Capital IQ to engage in investment activity. This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only current as of the stated date of their issue. Past performance is not necessarily indicative of future results. For details on the S&P Capital IQ conflict-of-interest policies, please visit: www.spcapitaliq.com/Policies

Notice to all Non U.S. Residents: S&P Capital IQ’s Industry Surveys may be distributed in certain localities, countries and/or jurisdictions (“Territories”) by independent third parties or independent intermediaries and/or distributors (the “Intermediaries” or “Distributors”). Intermediaries are not acting as agents or representatives of S&P Capital IQ. In Territories where an Intermediary distributes S&P Capital IQ’s Industry Surveys, the Intermediary, and not S&P Capital IQ, is solely responsible for complying with all applicable regulations, laws, rules, circulars, codes and guidelines established by local and/or regional regulatory authorities, including laws in connection with the distribution of third-party investment research, licensing requirements, supervisory and record keeping obligations that the Intermediary may have under the applicable laws and regulations of the territories where it distributes the Industry Surveys. Industry Surveys are not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject S&P Capital IQ or its affiliates to any registration or licensing requirements in such jurisdiction. Industry Surveys are not directed to, or intended for distribution to or use by, any person or entity who is not in a class qualified to receive Industry Surveys (e.g., a qualified person and/or investor), as defined by the local laws or regulations in the country or jurisdiction where the person is domiciled, a citizen or resident of, or the entity is legally registered or domiciled. S&P Capital IQ’s Industry Surveys are not intended for distribution in or directed to entities, residents or investors in: Albania, Belarus, Bosnia, Burma, Cote d’Ivoire, Croatia, Cuba, Democratic Republic of the Congo, Former Yugoslav Republic of Macedonia, Herzegovina, Iran, Iraq, Kosovo, Lebanon, Libya, Montenegro and Serbia, North Korea, Somali, Sudan, Syria, Taiwan, Yemen and Zimbabwe. For residents of Australia: Industry Surveys are issued and/or distributed in Australia by SPIS. Any express or implied opinion contained in an Industry Survey is limited to “General Advice” and based solely on consideration of the investment merits of the financial product(s) alone. The information in an Industry Survey has not been prepared for use by retail investors and has been prepared without taking account of any particular investor’s financial or investment objectives, financial situation or needs. Before acting on any advice, any investor using the advice should consider its appropriateness having regard to their own or their clients’ objectives, financial situation and needs. Investors should obtain a Product Disclosure Statement relating to the product and consider the statement before making any decision or recommendation about whether to acquire the product. Each opinion must be weighed solely as one factor in any investment decision made by or on behalf of any adviser and any such adviser must accordingly make their own assessment taking into account an individual’s particular circumstances. SPIS holds an Australian Financial Services License Number 258896. Please refer to the SPIS Financial Services Guide for more information at: www.spcapitaliq.com/FinancialServicesGuide For residents of China: Industry Surveys are not distributed in or directed to residents in The People’s Republic of China. Neither S&P Capital IQ nor its affiliates target investors in China. For residents of Kuwait: The Distributor, and not S&P Capital IQ, is responsible for complying with all relevant licensing requirements as set forth by the Kuwait Capital Markets Law (“CML”) and Kuwait Capital Markets Authority (“CMA”) and with all relevant rules and regulations set out in the CML and CMA rule books. For residents of Malaysia: All queries in relation to Industry Surveys should be referred to Ahmad Halim at [email protected]. For residents of Mexico: S&P Capital IQ is not regulated or supervised by the Mexican National Banking and Securities Commission (“CNBV”). S&P Capital IQ has a licensed rating agency affiliate in Mexico (Standard & Poor’s, S.A. De C.V.), of which S&P maintains firewalls and seeks to avoid conflicts of interest, pursuant to approved policies. For residents of Qatar: The Distributor, and not S&P Capital IQ, is responsible for complying with all relevant licensing requirements as set forth by the Qatar Financial Markets Authority or the Qatar Central Bank, and with all relevant rules and regulations set out in the Qatar Financial Markets Authority’s rule book, including third party branded investment research distribution of securities that are admitted for trading on a Qatari securities exchange (Admitted Securities). Copyright © 2014 Standard & Poor’s Financial Services LLC. All rights reserved. STANDARD & POOR’S, S&P, S&P 500, S&P EUROPE 350 and STARS are registered trademarks of Standard & Poor’s Financial Services LLC. S&P CAPITAL IQ is a trademark of Standard & Poor’s Financial Services LLC.

hhd 0914 close 09-17-14...ethan allen interiors inc. reported a 2.9% year-on-year increase in...

Documents