Indicators Brighten Furniture Picture

December 29, 2003
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HOLLAND — After three painful years, they’re ready for growth. Even a little.

In the coming months office furniture manufacturers may finally begin to see a sustained, albeit small, uptick in business as the rebounding U.S. economy begins to trickle down to the industry.

Recent economic data for three key industry indicators — corporate profits, capital spending and job growth, the latter of which has significantly lagged the economy’s recovery — look positive for 2004, potentially providing the foothold that furniture makers need to begin climbing out of a very deep hole.

“For the first time in almost three years the business climate is suggesting a brighter outlook for the industry,” Herman Miller Chairman and CEO Michael Volkema said during a recent conference call with brokerage analysts to discuss the company’s latest quarterly results.

“In short, we are becoming much more optimistic about the future and our ability to participate in the emerging economic rebound,” Volkema said. “This truly is a season of hope.”

While Herman Miller this month reported lower sales and earnings from year-ago levels for the quarter that ended Nov. 30, recent activity provides reason for optimism.

The company experienced a strong 10.5 percent increase in the order rate from the previous quarter, from $323.9 million to $357.8 million, and a 14.6 percent increase in backlogged orders, which grew from $188.2 million in the previous quarter to $215.7 million for the latest period. The backlog was the largest in nine quarters for Herman Miller and the order rate is the best in six quarters.

Customer visits to Herman Miller also are up 30 percent from the previous quarter. This provides further reason to believe the stage is set for a sustained recovery for an industry in which sales plunged more than two-thirds since 2001, to a level first surpassed nearly a decade ago.

At industry leader Steelcase Inc., the optimism is tempered amid the expectations of further losses and sales declines in the present quarter, as well as a pending restructuring of the North American division that could bring further plant closings and consolidations and job cuts. Still, executives told brokerage analysts this month that in addition to the economic data, the company is seeing customer visits rise and significant increases in large account activity.

“We are seeing several positive signs in the overall economy,” Chief Financial Officer James Keane said. “Those external factors are more positive than they have been in years.”

The most recent industry outlook from the Business and Institutional Furniture Manufacturers Association, or BIFMA, calls for a 2.4 percent increase in furniture production in 2004, to $8.6 billion. That’s after a projected 5.6 percent decline in production in 2003 from the prior year, to $8.39 billion, which overall will represent a 35 percent decline from the office furniture industry’s peak of $13.28 billion in 2000.

Economic data supporting the beginning of an industry rebound in 2004 comes on a variety of fronts. Key for office furniture makers — and this is a really big question mark — is where and in what sectors the projected increases in capital spending and employment occur.

“Where is the growth going to be?” BIFMA Executive Director Tom Reardon said. “It all needs to translate down to office furniture.”

Even if the BIFMA forecast does pan out — and Reardon is reasonably confident it will — “that’s not a big climb out of the hole that we’re in,” he said.

Yet even with the unknowns and the depth of the industry’s fall, the recent economic reports do generate some hope.

For instance, the annual CEO survey by The Business Roundtable, an association of chief executives at corporations that collectively employee more than 10 million people, points to expectations of better U.S. economic performance. Thirty-five percent of those responding to the survey indicated they expect their company to increase capital spending in the next six months, and only 6 percent expect a decrease.

A quarter of the CEOs answering the survey anticipate increased employment in the next six months, more than double the hiring rate foreseen in The Business Roundtable’s last survey in October. The CEOs also anticipate a national GDP of 3.6 percent for the United States during that period.

Overall, the survey’s “CEO economic outlook index” stood at 89.6 percent in December, a finding that compares quite favorably to an index of 67.7 percent in July and 52.7 percent as of 13 months ago. The results show that CEOs believe the U.S. economy is poised for strong performance during the first half of 2004.

In a survey of chief financial officers, Duke University found even stronger numbers.

Sixty-three percent of the CFOs surveyed expect their firms to increase capital spending in 2004, with an average increase of 5 percent. Two-thirds of the respondents plan to increase employment levels next year, at an average of 2 percent.

Eighty-eight percent of the CFOs in the Duke University survey, conducted during the second week of December, anticipate increased corporate earnings in 2004, by an average of 14 percent.

Add to that the results of Manpower Inc.’s most recent employment outlook survey, which this time found optimism for hiring in the first quarter. Hiring in the finance/insurance/real estate sector alone for the first three months of 2004 “is a picture of stability” and the strongest since the second quarter of 2001, Manpower said.

Executives at Steelcase and Herman Miller certainly welcome that kind of economic data, yet tread cautiously when talking about the industry’s prospects in the months ahead, especially given how far things have fallen since the late 1990s, when business was booming with the roaring U.S. economy.

At Steelcase, CEO James Hackett told analysts that for now, he’s sticking with BIFMA’s current outlook for industrywide production of 2.4 percent growth in 2004.

“I don’t know anything today that would alter the BIFMA forecast,” Hackett said.

Herman Miller’s Volkema expects business to pick up gradually and gain momentum in the next 12 to 18 months as the U.S. economy improves.

“Let me say, we are not operating under any false expectation that employers will return to the unrestrained wild abandon of the late ’90s. They probably will remain cautious, concerned about the magnitude and duration of the recovery,” Volkema said during the Dec. 18 conference call.

For the current third quarter, which typically sees a drop-off in sales due to the time of year, Herman Miller expects to record sales volumes close to second quarter levels because of the emerging recovery and looks forward “to even greater opportunity in the future,” Volkema said.

Herman Miller expects FY2004 third-quarter sales of $320 million to $335 million and net income of 5 cents to 11 cents per share with a 3-cent per-share restructuring charge.

Herman Miller this month reported second-quarter sales of $330.3 million, down 7.6 percent from the $357.3 million in the same period a year ago. Mid-way through the 2004 fiscal year, Herman Miller’s sales totaled $654.8 million, off 7 percent from the $704.2 million of a year earlier.

Quarterly net income was $9.1 million, or 12 cents per share, down 22.9 percent from $11.8 million, or 16 cents per share a year ago. The results included a $4.4 million pre-tax restructuring charge. Mid-year net income was $15.2 million, or 21 cents per share, off 29.6 percent from the $21.6 million, or 29 cents per share, for the first six months of the 2003 fiscal year.

Executives said they were expecting the lower sales, given what they termed a “false start” a year ago in the U.S. economic rebound, and are encouraged by the increased order rate and backlog, which don’t translate into recorded sales until product is delivered and installed.    

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