The Cutting Edge — December 2003

Business Briefing

Background
Over the past 25 years, furniture producers located in low-cost labor countries around the world have gradually captured the wood furniture market in the U.S. China, for example, grew its furniture exports to the U.S. from only $100 million in 1992 to $5.7 billion in 2002. Other major source countries are shown in the table below:

U.S. Furniture Imports Jan-June 2003 (in $ millions)
Source Country	2003	2002	% Change
China	$3,639.4	$2,843.7	28%
Canada	1,071.8	1,087.8	-1
Italy	665.2	629.1	6
Mexico	424.1	381.9	11
Taiwan	293.8	325.2	-10
Indonesia	276.3	276.8	0
Malaysia	247.9	222.3	12
Thailand	166.1	161.2	3
Brazil	139.3	120.1	16
Philippines	113.5	104.5	9
WORLD	$ 7,951.4	$ 7,041.3	13%

By 2002 industry experts estimated that nearly 50% of all furniture sold in the U.S. was imported. Wood furniture and components accounted for about 55% of those imports. In the first half of 2003 alone, wood bedroom imports rose 19% to $1,130 million. China shipped 46% of that volume.

The impact on the wood furniture manufacturing industry in the U.S. by the late 90’s was profound. In the two years from 2000 to 2002, U.S. bedroom production fell by 21%, and the operating income of U.S. producers plunged by 47%. Nearly 36,000 workers in the segment were displaced.

And the downward trend continues. In 2003 North Carolina alone has lost 3,123 jobs in the closure of 16 furniture plants and an additional 832 jobs in nine other layoffs.

The First Shot
On July 15 the American Furniture Manufacturers Committee for Legal Trade (AFMCLT), a group of 15 U.S. producers, announced its intention to file an antidumping petition against the import of wood bedroom furniture from China. This action requests the U.S. Department of Commerce (DOC) and the U.S. International Trade Commission (ITC) to investigate unfair pricing of imports i.e., dumping.

On October 31 the group, now comprised of 27 U.S. producers, one labor union, and eleven unnamed supporters filed their formal petition seeking the imposition of duties ranging from 158% to 440% on Chinese bedroom imports. Among that group are well-known producers like Bassett, Vaughan Bassett, Hooker, Stanley, and Keller.

Note that many of the AFMCLT members actively import from China.

The Law
The Tariff Act of 1930 governs the application of antidumping duties. In 1995 this law was amended to reflect the World Trade Organization (WTO) Antidumping Agreement to which the U.S. is a party. All of the other 143 members of the WTO, including China, are also parties to this agreement.

The purpose of the law is to prevent damage to domestic industries by the sale of imports below the price for which a like product is sold in the exporting country. Because China is a ‘non-market economy,’ their prices are deemed to be the cost of production in a surrogate economy. The AFMCLT has requested that India be the surrogate country for purposes of their action.

Many have blamed China’s fixed currency exchange rate as a prime contributor to their competitiveness in furniture and all other products. However, since the DOC and ITC will use Indian costs in their calculations, the currency issue is irrelevant in this action.

The Combatants
In addition to the AFMCLT four other groups have marched up to the firing line:

• Opposing Domestic Producers – Furniture Brands International is the leading U.S. producer opposing the petition. FBI has clearly stated its intent to build foreign plants and reduce investment in its present U.S. facilities.
  
• Chinese Manufacturers – A group of these producers have retained legal counsel to represent them before the DOC and ITC.
  
• Opposing Domestic Retailers – Large furniture retailers like Havertys, Crate & Barrel, JC Penney, and Rooms To Go have formed a committee and retained legal counsel. Many of these large companies purchase directly from Chinese factories. Rooms To Go and two other Top 100 retailers, American Furniture Warehouse and Value City, are discontinuing their purchases from the petitioners.
  
• Supporting Domestic Retailers – 500 small furniture retailers are supporting the petition. 80% of furniture retailers in the U.S. have four or fewer stores. Two-thirds sell less than $5 million of furniture annually. At that small size, these stores cannot efficiently source directly from many Chinese factories.

• Will other wood furniture categories beyond bedroom ultimately be affected?
• Will importers simply move purchases to countries other than China?
• Will Chinese factories shift to other wood furniture categories like home office?
• Will U.S. producers use the relief provided by the tariffs to transform their businesses?
• How will prices paid by the consumer for furniture be affected?
• Will higher prices mean lower furniture demand?
• Can the dispute between producers and retailers be resolved?

Office Furniture – BIFMA reported that October shipments were flat vs. the same month last year. In a revision to its 2004 forecast, the trade association lowered its expectations for next year's shipments from up 14% to up only 2.4%. Their projected recovery for the office furniture industry has been pushed back to the second half of 2004.

Industry analysts are optimistic about a return to growth based upon (a) the apparent stabilization of demand after 30+ months of declines and (b) the 8.2% GDP 3Q growth.

• American Woodmark, the second largest U.S. cabinetmaker, reported sales growth of 17% for their 2Q2003, but gross margin fell to 20.2% from 24.3% in the same quarter 2002. Management blamed the decline on higher lumber, pension, and medical costs as well as increases in overtime. Operating margin also suffered, falling to 8.1% from 10.5%.
  
• Masco, the largest U.S. cabinetmaker, reported better performance in their cabinet divisions during their 3Q2003. Cabinet sales increased nearly 9% to $802 million with operating margin slipping slightly from 15.4% in 3Q2002 to 15.2%.

• Furniture Brands International 3Q results included total revenues of $557.7 million (down 1%), gross margin of 26.9% (down 5.5%), and operating profits of $34.8 million (down 19.1%). Management continues to blame lower sales on weakness in the higher price points. FBI’s Thomasville Furniture division announced the layoff of 200 workers across its 13 North Carolina wood furniture plants.
  
• La-Z-Boy, America’s second largest furniture producer, reported a 9.3% decline in 2Q2004 sales to $511 million. Operating margin fell to 5.3% from 8.4% last year. For the first half of FY2004 sales were down 9.3%, and operating margin declined from 7.6% to 4%. The wood furniture segment saw sales fall 13.8% during the first half with operating margin at (2.2%). Management announced a new executive team to lead wood operations.
  
• Casegoods maker Stanley Furniture reported 3Q2003 sales of $65.2 million, up 6.3%. This result represented the company’s sixth consecutive quarter of sales growth. Gross margin dropped to 24% while operating margin fell slightly to 9.9% due to higher SG&A costs attributable to product and market development.
  
• Ethan Allen reported 1Q2004 (FY) sales of $222.8 million, up 2.9% over the prior year. Gross profit increased by 1.6% while operating margin fell to 12.7% from 14.7%. Incoming orders advanced by 11.3% indicating strong revenue growth in future quarters.
  
• Chromcraft Revington reported a 9.5% decrease in 3Q2003 sales and lower operating profits. Management attributed this weakness to increased foreign competition and a weak economy.
  
• Casegoods producer Keller Furniture reported a sales drop of nearly 40% in its 3Q along with net loss of $5.9 million. For nine months of the current fiscal year sales declined 36% to $17.7 million. Management blamed continuing heavy competition from foreign producers in its bedroom and dining room categories.
  
• Hooker Furniture announced that 3Q2003 sales increased by 36.6% to $54.7 million. Net income rose to $3.5 million or 6.3% of sales. The company set a nine-month sales record of $229.3 million, up nearly 29% from 2002. These results are attributable to the acquisition of Bradington-Young, a leather upholstery specialist, in January 2003, and the strong sales growth of their imported wood furniture. Shipments of their U.S. made products continue to decline. Their four wood plants are running below capacity.
  
• Palliser Furniture, Canada’s second largest furniture maker, announced its exit from the solid wood casegoods business. Its DeFehr division plant has been sold to a private investor group. Management indicated that the sale was driven by the difficulty of competing with low-cost Chinese factories. The company will continue to import wood casegoods.
  
• RTA producer, Bush Industries, announced a 6.4% sales decline to $79 million for its 3Q2003. Despite aggressive cost cutting the quarter resulted in a net loss of $3.6 million. Nine months sales were $224.7 million, down nearly 11%, and the net loss was $16.7 million.
  
• Another RTA producer, O’Sullivan, also announced a decline in business with its 1Q2004 (FY) sales of $71.5 million, about even with the same quarter last year. Operating income was $3.8 million , a decline to 5.4% on sales vs. 11.1% in 1Q2003. Plants ran below capacity resulting in poor fixed cost absorption. In addition promotional activities with several key retailers increased selling costs. The bottom line showed a net loss of $7.3 million. The company introduced a wide range of new products at the October High Point Market.