s&p - industry surveys household durables

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

Industry Profile .................................................................................................... 11

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 January 12, 2012. The next update of this Survey is scheduled for January 2013.

Industry Surveys Household Durables Jim C. Yin, Household Durables Equity Analyst

July 5, 2012

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S&P CAPITAL IQ INDUSTRY SURVEYS (ISSN 0196-4666) is published weekly. Reproduction in whole or in part (including inputting into a computer) prohibited except by permission of S&P Capital IQ. 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 The McGraw-Hill Companies, Inc.: Harold McGraw III, Chairman, President, and Chief Executive Officer; Jack F. Callahan, Jr., Executive Vice President and 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. Periodicals postage paid at New York, NY 10004 and additional mailing offices. Postmaster: Send address changes to S&P Capital IQ, Industry Surveys, Attn: Mail Prep, 55 Water Street, New York, NY 10041. 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 © 2012 Standard & Poor’s Financial Services LLC, a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved. STANDARD & POOR’S, S&P, S&P 500, S&P MIDCAP 400, and S&P SMALLCAP 600 are registered trademarks of Standard & Poor’s Financial Services LLC.

INDUSTRY SURVEYS HOUSEHOLD DURABLES / JULY 5, 2012 1

CURRENT ENVIRONMENT

Industry performance remains weak in early 2012

Sales growth of household durables slowed in 2011, and rebounded slightly so far in 2012. Any growth in sales was fueled largely by a rise in prices and favorable foreign currency exchange fluctuations. While overall industry sales have been sluggish, sales of high-end goods that target the more affluent consumers (e.g., specialty bedding) performed well, growing at a low-teen-digits rate. Meanwhile, the mid-tier furniture segment saw slight declines, as many customers who are spending cautiously trade down to low-end products.

Sales and volumes see slow growth In 2011 and in the first quarter of 2012, most of the major players in the furniture and bedding space experienced modest sales growth. In 2011, total retail sales for furniture and bedding rose around 2% to $79.9 billion, from $78.5 billion in 2010, according to Furniture Today. Most furniture manufacturers also do not expect to see much growth this year. They are conservative in their outlook due to the cautious spending environment, in which consumers are spending only during the holiday seasons or during periods of discounts and sales.

While some furniture manufacturers experienced weak sales growth in the first quarter of 2012, a few actually experienced a sales decline. For example, Furniture Brands International Inc. reported a 3.6% decline in its first-quarter sales, dropping to $287.2 million from $297.8 million in the year-earlier period. To further illustrate the slowdown in sales in the first quarter, we can look at Knoll Inc., a manufacturer specializing in office furniture. On a year-over-year basis, the company reported a decline of 11.0% in net sales in the first quarter of 2012.

Strong sales momentum in specialty bedding and high-end furniture Although demand and unit volume have remained flat in general, the bedding segment (specialty bedding, in particular) and, to a lesser extent, the high-end furniture segment have witnessed strong sales growth. According to data from the International Sleep Products Association (ISPA), a mattress industry trade group, the value of wholesale bedding shipments rose 7.7% in 2011, with unit shipments rising 0.2% from the prior year to 34.9 million units. We expect the growth trend to continue through 2012, as some of the major players witnessed solid growth in the first quarter. For example, Tempur-Pedic International Inc., a manufacturer of beds, pillows, and bed linens, reported 18% growth in sales in the first quarter of 2012 over the previous year. Net sales in its North American segment increased 17%, while sales in the international segment increased 19%.

The first-quarter results for Select Comfort Corp., another player in the bedding industry, also point toward a similar trend. In that quarter, on a year-over-year basis, the company reported a 35.9% increase in sales, with a 26.0% increase in wholesale revenue and a 36.0% increase in retail comparable–store sales. As an example of sales momentum in the high-end furniture segment, Ethan Allen Interiors Inc. reported a gain of 8.0% in its first-quarter sales.

Sales declined for appliances This year, so far, has been less promising for appliance manufacturers, which are struggling with weak consumer demand, a soft housing market, and competition from cheaper imports from developing countries. According to industrywide sales data from the Association of Home Appliance Manufacturers (AHAM), an industry trade group, unit shipments for all major appliances for the first four months of 2012 totaled 20.1 million, down 5.7% from the same period last year.

Some leading appliance manufacturers, such as Whirlpool Corp. and AB Electrolux, reported declining year-over-year sales in Q1-2012. Whirlpool saw sales drop 1.2% in the first quarter, with the company taking a hit from a weak performance in North America, where unit shipments declined around 7%. While


Electrolux reported a sales gain of 10.4% for the first quarter, its sales in the North America region grew only 5.6%; unit shipments declined 6% in the US over the same period.

THE US ECONOMY: KEY TO HOUSEHOLD DURABLES INDUSTRY GROWTH

We believe the sluggish growth in the household durables industry reflects the health of the US economy and the housing market. Although the economy continues to recover, the pace of the recovery has been subdued compared with prior recoveries due to weak job growth, coupled with low consumer confidence and stagnant income levels. In addition, the deepening debt crisis in Europe is a cause of concern for the US economy. These factors have resulted in a weak recovery of the housing market, even with low mortgage rates.

GDP growth still lagging Throughout 2011, the US economy grew at a sluggish pace. Real gross domestic product (GDP) growth improved from 0.4% in the first quarter to 1.3% in the second quarter, and then increased to 1.8% in the third quarter and 3.0% in the fourth quarter. For full-year 2011, real GDP grew at 1.7%. Standard & Poor’s Economics (which operates separately from S&P Capital IQ), as of May 2012, forecast a 2.1% increase in real GDP for 2012 and 2.4% for 2013.

Unemployment still high Unemployment levels, which reached a historic peak of 10.1% in October 2009, stood at 9.6% in 2010 and 9.0% in 2011. As of April 2012, the unemployment rate was 8.1%, two percentage points below its recession peak, down slightly from 8.2% in the previous month. As of May 2012, Standard & Poor’s Economics expected the unemployment rate to be 8.1% for 2012 and 7.8% for 2013.

Although the unemployment rate has fallen by about 1% in the past year, the number of jobs created has been modest. The nonfarm payrolls report showed that the US economy added only 115,000 jobs in April, which was the smallest month-over-month gain since last October’s 112,000 count. It was much worse than consensus expectations for 163,000 nonfarm job gains and our forecast for 170,000. Businesses, which earlier had helped offset government job losses, have also slowed down their new hiring. Private payrolls added 130,000 jobs in April, and upward revisions for the prior two months added 66,000 more jobs to the rosters. Total nonfarm payrolls in March and February were upwardly revised to add an additional 53,000 net jobs, which brings total nonfarm job gains in this report to 168,000.

Thus, the decline in the unemployment rate may be overstating the strength of the job market and the overall economy. For instance, people are leaving the labor force through retirement, have stopped looking, or are going back to school, all factors which have contributed to the lower unemployment rate. The labor force participation rate, which stood at 63.6% as of April 2012, is the lowest in more than three decades. We expect the unemployment rate to climb through 2012, as people who had previously given up and dropped out of the labor force decide to try again. However, the softer jobs data may keep them on the sidelines longer than we thought. The number of unemployed for 27 weeks or longer fell in April by 207,000 to 5.1 million, but it represents 41.3% of the total unemployed and remains near the record high reached in 2010. While the unemployment rate historically has been a reliable indicator of the health of the economy, we believe this data may be skewed by other factors.

Consumer confidence The Consumer Confidence Index, released monthly by the Conference Board, declined slightly from 69.5 in March 2012 to 69.2 in April. According to the Conference Board, “consumer confidence was virtually unchanged in April, following a modest decline in March. As was the case last month, the slight dip was prompted by a moderation in consumers’ short-term outlook, while their assessment of current conditions continued to improve. Overall, consumers are more upbeat about the state of the economy, but they remain cautiously optimistic.” In April 2012, those who believe jobs are “plentiful” dropped from 19.3% to 8.4%, and those expecting an increase in their income levels decreased from 15.5% to 14.0%.

Witnessing weak growth in the job market, consumers are grappling with low income levels, which are hindering their purchasing power. This purchasing power is also taking a hit from rising energy prices.


Consumers faced a drastic drop in real disposable personal income growth in the second half of 2011. Such income grew by 0.8% in Q3-2011 and by 0.7% in Q4-2011, much lower than the growth experienced in the same periods in 2010.

Consumer spending review Spending by consumers in 2011 and in the first quarter of 2012 has been higher than expected despite (or maybe because of) their recession fears. According to the Bureau of Economic Analysis (BEA), a federal agency that collects economic data, real personal consumption expenditures increased 2.9% in the first quarter of 2012, following a 2.1% increase in the fourth quarter of 2011. As of May 2012, Standard & Poor’s Economics was forecasting real personal consumption expenditures to rise 2.2% in 2012 and 2.1% in 2013, following increases of 2.2% in 2011 and 2.0% in 2010, and a 1.9% decline in 2009.

With some consumers demonstrating an increasing willingness to spend, we note that retail store sales in April 2012 declined 4.4% from the previous month and 4.3% from April 2011. It is important to remember that consumer spending dominates the US economy: it typically accounts for about two-thirds of gross domestic product (GDP), though the percentage has varied in recent years, from a high of 71% (in 2007) to a low of 64% (in both 2009 and 2010). Standard & Poor’s is forecasting that consumer spending will account for about 65% of GDP in 2012.

Savings rate The household savings rate—another

factor affecting consumer spending—is now in the mid-single digits as a percentage of total personal income, versus just 1.4% in 2005. As of May 2012, Standard & Poor’s economists were forecasting that the household savings rate would be 3.8% in 2012 and 3.4% in 2013, compared with 4.7% in 2011, 5.3% in 2010, and 5.9% in 2009.

The savings rate moved up considerably from 2.6% in 2008 to 5.3% in 2010, and then dropped back slightly to 4.7% in 2011. While a higher savings rate is considered prudent for individual households, it is not a positive indicator for stimulating household durables demand. Economists call this the “paradox of thrift”—actions that are appropriate and prudent for the individual can weaken the overall economy. The longest US recession may have changed the current environment for consumer spending for the worse, as households make an effort to reduce their outstanding debt.

Consumers in the US are in the deleveraging mode as they are skeptical of the current economic environment and see a huge drop in home values. According to the Federal Reserve Bank of New York’s Quarterly Report on Household Debt and Credit, released in February 2012, aggregate consumer debt fell by around $126 billion (a 1.1% decline) to $11.53 trillion in the fourth quarter of 2011, from $11.66 trillion in the third quarter. However, in the first quarter of 2012, aggregate consumer debt remained almost unchanged from the fourth-quarter level at $11.5 trillion, ending a period of nine consecutive quarterly declines. The nearly flat level of aggregate consumer debt in the first quarter of 2012 is partly due to a slight increase in the mortgage balances on consumer credit reports during the quarter. During the third and fourth quarters of 2011, mortgage balances on consumer credit reports fell by 1.3% and 1.6%, respectively. The household debt service ratio (DSR, a ratio of debt payments to disposable personal income) has declined continuously in the last 11 quarters (since the second quarter of 2009). The ratio dropped from 11.22 in the first quarter of 2011 to 11.11 in the second quarter. In the third quarter, the ratio dropped to 10.98, and then to 10.88 in the fourth quarter.

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

2011 6,451 34,484 40,935 83,951 124,8862010 6,083 34,453 40,536 81,561 122,0972009 5,728 33,746 39,474 78,436 117,9102008 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 81,551 119,9232002 4,284 33,322 37,605 80,692 118,2972001 4,213 31,526 35,739 77,086 112,825

Source: US Bureau of Economic Analysis.


Housing begins to show signs of mild recovery The housing sector also 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.

While the months’ supply of both existing and new unsold homes has dropped to near-normal levels of around six months, and prices are finally starting to ease, we do not expect to see a bounce once we hit the bottom. About two million loans are in some stage of foreclosure, according to CoreLogic, a provider of consumer, financial, and property information. In addition, this does not take into account the 1.7 million more homes for which borrowers have not paid their mortgages in more than 90 days. This means that the large number of properties that banks currently own is set to get bigger. The big “shadow” inventory of unsold homes that needs to be unwound in the soft recovery will keep prices from reaching their pre-crisis high for at least several years. The National Association of Realtors (NAR), a trade organization, reported that 28% of the 4.62 million existing home sales (seasonally adjusted annual rate, or SAAR) for April

2012 were distressed sales, which typically result in prices that are about 15% less than the prices paid for comparable homes.

Sales of existing homes (a category that includes single-family, townhomes, condominiums, and co-ops) totaled 4.62 million units (SAAR) in April, up 10% from the April 2011 level, and remain well above the 3.3 million trough in July 2010, though they are nowhere near the tax-credit-driven 5.38 million cycle high in November 2009. The NAR report on existing home sales indicated that first-time buyers accounted for 35% of homes purchased in April 2012, up from 33% in March 2012. Investors accounted for 20% of total transactions in April, down from 21% in March, but unchanged from 20% in April 2011. An interesting data point is that 29% of all existing home sales transactions in April 2012 were all-cash deals.

New single-family home sales of 343,000 units in April 2012 were only modestly above the 278,000 record low in August 2010 and still 22% below the April 2010 cycle high of 420,000 units. With no boost expected from the government, the sluggish sales pace will likely continue this year, as potential buyers remain cautious.

Homebuilding activity also saw a recovery in April 2012, with housing starts posting a 2.6% gain from March, at the seasonally adjusted annual rate (SAAR) of 717,000 homes, nearing January’s three-year high of 720,000. Of the total, single-family housing starts stood at 492,000, up 2.3% from March. For single-family homes, we expect low-to-mid-single-digit gains for 2012 and until mid-2013. Multifamily starts jumped about 60% in 2011 over 2010, on average, and are seeing similar gains this year. Even if people are not buying homes at pre-recession rates, they still need a place to live and rent instead. Renting increases demand for multifamily properties because most renters live in apartments. Demand for rentals will not weaken any time soon, in our view. Foreclosures, which will likely continue through the year, will transition many homeowners to renters. 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, at a 15-year low of 65.4% in the first quarter of 2012, will likely remain low for several years.

Chart H01: HOUSING ACTIVITY & OUTLAYS FOR HOME PRODUCTS

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Sales of existing homes (left scale)

Housing starts (left scale)

PCE– Furniture (right scale)

PCE– Major appliances (right scale)

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

(Thousands of units) (Billions of 2000 dollars)

HOUSING ACTIVITY AFFECTS OUTLAYS FOR HOME PRODUCTS


Sovereign debt concerns in Europe affect US economic outlook Struggling with recessionary conditions, the European economy has still not picked up, signaling a harsh environment for the global economy. According to Eurostat, the statistical office of the European Union (EU), the European economy remained flat in the first quarter of 2012, following a contraction of 0.3% in the fourth quarter of 2011 and growth of 0.3% in the third quarter. For full-year 2012, the International Monetary Fund (IMF) has projected growth of 1.1% for the overall euro area, while the European Commission has issued a more conservative forecast of 0.5%. The economy is grappling with fiscal austerity, deleveraging of the private sector, and high unemployment.

The problems in the European economy pose a potential threat to the strength of the US economy, which, although it shows signs of improvement, still has not recovered from the recent recession. The US economy is still in a delicate situation, with fears of a double-dip recession owing to the weak global economic environment. The sluggish housing recovery—along with soft job growth, high oil prices, huge fiscal uncertainties, and worries from abroad—have all combined to keep the risk of another recession occurring during the next 12 months high at 20%, according to Beth Ann Bovino, Standard & Poor’s economist. Nevertheless, the outlook is certainly much better than it was late last year, when the recession risk was 40%. As a result, consumer spending is far from its pre-recession levels and is currently being pulled up largely due to a declining savings rate.

FURNITURE DEMAND DRIVEN BY US HOUSING MARKET

The home furnishings industry is fueled in part by the housing market, which generally responds to interest rates, consumer confidence, and employment trends. The demand for furniture is modest to weak and 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, as noted earlier, are showing signs of recovery so far in 2012, which we expect will continue through mid-2013. As of May 2012, Standard & Poor’s Economics was projecting an 18.3% increase in housing starts in 2012 to 721,700 (from 610,100 in 2011) and a 37.0% increase in 2013 to 988,400. While the increase is 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.

The trend toward smaller homes Another trend that seems to be emerging in the US housing sector is that of smaller homes. According to data reported by the National Association of Home Builders (NAHB), the size of houses reached a peak of 2,521 square feet in 2007. It is expected that the average size of homes will decline to 2,327 square feet and is expected to drop to as low as 2,152 square feet in 2015. The NAHB believes that the demographic makeup in the US favors the trend for smaller homes. While young adults in the US prefer smaller homes with the desire to save energy, the older segment of the population is interested in living in less space. According to a survey conducted by NAHB, 52% of the respondents planned to build smaller homes in 2011 and 59% intended to build lower-priced homes. Further, 74% of the respondents believed single-family homes will be smaller by 2015 and another 68% believed their homes will have more green or energy-efficient features.

Further, most of the homes in the US will not have living rooms or will have smaller living rooms going forward. This also explains the strong growth in the beddings segment. Most Americans are opting for more bedrooms or bigger bedrooms, and doing away with living rooms, given their growing preference for smaller homes and desire to build lower-priced homes. According to the NAHB survey, four out of every five respondents (82%) said that the living room will not be a part of the house or will be merged with other areas in the house. At the same time, the respondents believed that a great room combined with a kitchen would form a part of a majority of homes going forward.

Growth in bedding The companies manufacturing mattresses, bed linens, cushions, and other such products have seen solid revenue growth in 2011. Unlike the furniture manufacturers, these companies have been able to generate greater demand for their products and have been able to raise their prices. According to the International


Sleep Products Association (ISPA) in its final report on 2011, the value of wholesale bedding shipments rose by 7.7% in 2011 from the prior year, while the growth in bedding units was only 0.2%. Average unit prices for all mattresses and foundations increased by 7.5% in 2011. The average unit price for specialty mattresses increased by 4.2% and for innerspring mattresses by 4.7%. In 2011, the specialty bedding segment recorded much higher unit growth than the innerspring mattresses segment. The specialty mattress segment registered a 24.3% gain in unit sales versus a 1.9% decline for the innerspring segment. Further, the dollar value for specialty bedding rose 29.5% in 2011, as against a 2.6% increase in the dollar value for the innerspring segment. In 2011, the specialty bedding segment also expanded its market share to 13.8% in unit terms (from 11.2% in 2010) and to 29.4% in dollar value terms (from 25.2% in 2010).

Owing to remarkably higher bedding sales in January and February 2012, and the modest recovery in the US economy, the ISPA revised its 2012 forecast upwards. In March 2012, the ISPA forecast a 3.5% rise in units shipped and a 7.2% rise in the dollar value of shipments, up from an earlier forecast of a 1% rise in units and 4% rise in the dollar value. For 2013, the ISPA expects a gain of 3.4% in unit shipments and a 6.6% gain in the dollar value of shipments.

As noted in the ISPA final report, the specialty beddings segment is performing particularly well, with the results for the segment outperforming the overall bedding industry. Sealy Corp., a mattress manufacturer, announced the setting up of a new specialty bedding division in September 2011, to expand its market share in the specialty beddings segment. In January 2012, the company announced two new gel-cushioned specialty bedding lines named Optimum under its Posturepedic brand. Hendrixson Furniture, a furniture retailer in Pennsylvania, is doing good business with Shifman mattresses, a high-end bedding brand. The retailer has done more than half of its bedding business in beds priced at $5,000 or higher in Shifman’s up-market Master’s Collection. The company believes that higher-income customers have weathered the downturn better than others and are willing to spend on quality products even if they have a higher price.

APPLIANCE SALES REMAIN WEAK IN US AND EUROPEAN MARKETS

According to a December 2011 report by IBISWorld, a market research firm, sales of the major household appliances totaled $17.2 billion in 2011, representing an average annual decline in sales of 5.2% in the last five years. The refrigerator and freezer category represent the largest product segment, accounting for 25% of the total sales in 2011, followed by the household laundry equipment category (24% of total sales), and household cooking appliances (21%). In 2011, sales declined for most of the year due to a weak housing market and input cost pressures. According to data from the Association of Home Appliance Manufacturers (AHAM), unit shipments for all major appliances totaled 20.1 million through April 2012, down 5.7% from the first four months of 2011, when total shipments totaled 21.3 million. Only a few categories experienced year-over-year growth in the first four months of 2012, such as kitchen clean-up disposers (up 9.3%), chest food freezers (+4.9%), and room air conditioners (+3.8%). The categories witnessing the largest declines included dehumidifiers (–33.4%), portable dishwashers (–29.5%), and gas ovens (–25.2%).

Whirlpool Corp., the world’s largest appliance maker, said its sales in North America fell by 2.1%, year over year, in 2011, following an increase of 2.0% in 2010 and an 11.0% decline in 2009. The company believes the decline in sales was primarily due to a 2% drop in units sold owing to recessionary conditions, low consumer confidence, and inflation. Based on the current economic outlook, the company said it expected its US unit shipments to remain flat to up 3% for full-year 2012. In the first quarter of 2012, the company saw demand in North America trending toward the lower end of its flat to 3% guidance for 2012. The company experienced a decline of 7% in North American unit shipments in the first quarter.

Another problem for appliance makers is increased competition from cheaper imports from South Korea and Mexico, with foreign manufacturers riding on much lower cost of production. Even the bigger appliance manufacturers in the US are taking a hit. As a result, on December 30, 2011, Whirlpool filed antidumping petitions with the US International Trade Commission (ITC) and the US Department of Commerce (DOC) against imports of residential washers from South Korea and Mexico (including imports from Samsung Electronics and LG Electronics). The company has also filed a petition protesting the subsidies on imports of these products from South Korea. The company has raised objections that the US players do not get a level playing field to operate in with imports from other countries being made available


at a price much lower than the fair price for such products. There have been some positive signals for the industry with the US International Trade Commission (ITC) voting in favor of the point that these imports are causing harm to the appliance industry in the US. Investigations by these agencies are expected to continue through February 2013.

Earlier, in March 2011, Whirlpool had filed antidumping and countervailing duty petitions against refrigerators from South Korea and Mexico. The DOC had considered a 15.41% and 30.34% antidumping duty on bottom-mount refrigerators from South Korea and Mexico, respectively, along with countervailing duties of 12.9% on refrigerators from South Korea. However, on April 17, 2012, the ITC rejected the petitions demanding import duties on refrigerators, saying that Whirlpool was not “materially injured” by the imports from South Korea and Mexico. According to a Wall Street Journal article dated April 17, 2012, the US in 2011 imported $965.5 million (dollar value) of refrigerators from South Korea and $2.3 billion from Mexico. Considering such a high value of imports, this decision went against the expectations of an industry already struggling with poor domestic demand.

Europe appliance sales continue to lag Europe also experienced steep declines in demand for household appliances in 2008 and 2009. In 2011, Whirlpool reported a 2.4% increase in sales in the Europe, the Middle East, and Africa (EMEA) region (though sales would have declined 3.1% if currency effects were excluded) versus a 6% increase reported in 2010. Further, in the first quarter of 2012, the company witnessed an 8.0% drop in sales (a 3.0% drop excluding the impact of foreign currency) and a 4.0% decline in unit shipments for the EMEA region. The company believes that Europe remains one of the most challenging markets and forecasts a decline in unit shipments of 2%–5% in Europe for full-year 2012.

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.

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. Although China and India have billions of residents, many of whom are entering the middle class as their economies grow, there are some concerns regarding the strong presence of domestic players within these countries. 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. It anticipates 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. The survey explained that smaller cities are expected to grow the fastest because of their lower living costs compared with cities like Beijing and Shanghai.

Latin America experienced strong appliance sales growth in 2010, but moderate growth in 2011 owing to high inflation and almost flat demand in the region. In 2011, Whirlpool, the market leader in this region, posted a 7.8% increase (3.0% gain excluding the impact of foreign currency) in net sales in Latin America and a 1.4% gain in units shipped. In the first quarter of 2012, Whirlpool had a 3.0% sales gain (a 7.0% gain excluding the impact of foreign currency) and 2% increase in units shipped. There were gains because of favorable product price mix and the ongoing initiatives by the company to improve productivity. At the end of the first quarter, the company expected shipments in Latin America to increase toward the high end of its forecast range of 2%–5% for full-year 2012. Unlike in the US, the housing industry in these countries remains relatively stable, with government subsidies for low-income households. Credit has historically been less accessible in Latin America, but is now more available, with recent offerings from banks and retailers. However, with energy prices and water shortages rising in many emerging markets, energy efficiency is a growing area of importance.


Home improvement market appears to be stabilizing Many homeowners who embark on home makeovers target the kitchen, which often includes upgrading appliances. One-third of all cook tops and wall ovens are purchased as part of a kitchen makeover, according to Consumer Reports magazine. In 2009, the full impact of the US recession hurt home improvement product sales, which fell 8.3% to $267 billion, according to the Home Improvement Research Institute (HIRI), an organization of retailers, manufacturers, and allied organizations within the home improvement industry. According to HIRI’s latest available forecast (March 2012), home improvement growth in 2011 was expected to have reached 3.8% (up from its September 2011 forecast of 2.8%), owing to stronger growth of around 6% in the second half of 2011 over the same period in 2010. Further, according to HIRI, total home improvement product sales will grow 5.0% in 2012 to reach $283.0 billion.

In our opinion, near-term household concerns about the US economy remaining relatively weak means that associated demand for expensive remodeling will do likewise. Although conditions are stabilizing, we believe this is not a bullish time for household appliances, and even the makers of luxury brand appliances are feeling material effects of lower discretionary spending. With home construction down, more contractors that had been involved in building new homes may take home improvement jobs. There have been signs of a mild recovery in the first quarter of 2012 owing to warmer weather conditions, though the home improvements undertaken were more of the minor type as against the major ones such as a new bedroom or a new kitchen. For instance, Home Depot Inc. reported a 5.9% gain in sales in the first quarter of 2012. In its first-quarter earnings call in May 2012, the company said that it had exceeded its performance targets consecutively in the fourth quarter of 2011 and the first quarter of 2012, due to unusually warm weather (the fourth warmest winter in history).

Assuming a recovery in the housing market, along with a healthier employment situation, HIRI forecasts 4.6% growth in 2013 and 5.9% growth in 2014. For 2015 and 2016, HIRI forecasts 5.9% and 4.1% growth, respectively, with the total market expected to reach $345.5 billion by 2016. We see a similar trend for home improvement retailers Home Depot Inc. and Lowe’s Companies Inc. (which are covered in the Retailing: Specialty Survey), with their sales likely increasing 3.3% in 2012 and 2.5% in 2013, following similar increases (2.8% for Home Depot and 2.9% for Lowe’s Companies) in 2011.

OPERATING COSTS ON THE RISE

Many of the key input costs for household durables companies have risen substantially, with additional increases a distinct possibility. Indeed, commodities such as cotton, steel, and lumber have surged through 2011, some even doubling in cost. Also, the prices for most raw materials have not eased so far in 2012. Rising cotton and lumber prices have the most impact on the furniture companies, including Furniture Brands and La-Z-Boy Inc. With the group still struggling to stabilize following the recession, most companies have expressed concerns about raising prices for their products to recoup these higher costs. Indeed, we believe that consumers in most furniture segments remain extremely price sensitive, and any price increases could hurt demand.

Higher raw material costs Prices for the main raw materials are on the rise, offsetting any increases in productivity and operating profits. For raw cotton, the Producer Price Index (PPI) released by the US Department of Labor’s Bureau of Labor Statistics (BLS), showed a year-over-year increase of 13.7% in March 2012, which then eased somewhat in April. For the commodity group (logs, timber, and the like), the PPI was up by 3.3% in April 2012 from April 2011.

Considering the results for companies, such as Leggett & Platt Inc., Armstrong World Industries (AWI), and Furniture Brands, we can see that these companies have put in place various cost reduction/control measures in anticipation of raw material inflation. These companies have been experiencing lower growth in their earnings before interest and taxes (EBIT) and EBIT margins in recent quarters. For instance, in the first quarter of 2012, the EBIT margin for AWI dropped to 6.3% from 7.6% in the same period last year. Further, the company expects raw material and energy inflation to increase its costs by around $25–$30 million for full-year 2012. Similarly, Leggett & Platt reported a drop in its EBIT margin to 7.9% in the first


quarter of 2012 from 8.3% in the prior-year period. Toward the end of 2011, the company undertook some major cost reduction initiatives such as trimming its workforce and consolidating certain operations. These companies typically have short-term commitments from their suppliers, which causes the prices for raw materials for these companies to move in tandem with the prices in the market. Furniture Brands reported a drop in its gross margin to 24.9% in the first quarter of 2012, from 26.0% in the same period last year. However, the company reported an operating profit in the first quarter of 2012, versus an operating loss in the same period last year, owing to the company’s cost reduction strategy.

Players in the beddings space are also facing high raw materials price inflation. In May 2011, Furniture Today reported that all major bedding producers are mulling price increases in order to combat the mounting cost inflation. The inflation for latex is the highest among all other materials for the bedding companies.

Meanwhile, Whirlpool, which uses large amounts of steel, oil, plastic resins, and base metals (such as aluminum, copper, zinc, and nickel) to produce its products, also sees further cost headwinds in the future. Specifically, it anticipates material cost inflation to be approximately $300 million to $350 million in 2012.

POLARIZED OUTLOOK FOR HOUSEHOLD DURABLE COMPANIES

Although the economic outlook for 2012 is still fraught with “significant downside risks,” to quote the Federal Reserve, we still expect that growth in the US will withstand the recent shocks better than in 2011. The economy, though still quite uncertain, is showing mild signs of recovery, with slightly improved 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 2012. With the job market remaining soft, the sovereign debt crisis spooking investors, and worries that the US government dysfunction will lead to something more severe, consumer and business spending will remain subdued. We expect real GDP to rise 2.1% in 2012 and 2.4% in 2013, versus the 1.7% gain in 2011. The unemployment situation will remain soft, with the unemployment rate expected to be 8.1% for 2012 and slightly lower at 7.8% for 2013.

In a consumer survey done in July 2011 by BIGresearch, a market research firm, 50% of the consumers replied that they will plan each purchase more cautiously in the coming five years, and the other 48% said they would spend according to their budget and be more sensitive towards the price when buying clothing and food. Only 12% were unaffected by the current state of the economy. In our opinion, household durables spending is likely to come from the affluent segment—those with annual incomes of $100,000 or higher that comprise 20% of US households, but account for more than 50% of the country’s total household income. According to industry studies, the affluent represent $1.2 trillion in consumer expenditures, and we believe that if the economy and markets do not derail, the affluent segment will continue to increase its discretionary purchases and lead the broad consumer market out of the doldrums.

With only modest improvements expected in the unemployment rate, we think that a significant portion of the US population will remain very 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 concerning 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 very concerned with their current situation and are not comfortable spending on large-ticket discretionary items. This implies that there is demand for the high-end products from the top-end consumers and demand for the low-end products from consumers looking to trade down to cheaper alternatives, while there is not much demand for middle-range products that are experiencing an overall decline.

Home furnishings sub-industry outlook We have a neutral fundamental outlook on the home furnishings sub-industry for the next 12 months. Demand for home furnishings is largely dependent on the housing market, the state of which is quite uncertain currently. Standard & Poor’s economists estimate US housing starts for 2012 at 721,700, up 18.3% from 610,100 in 2011. However, we expect most of these gains will be in multifamily rental units and that single-family homes will see only a modest improvement.

Despite record low mortgage rates, with the average 30-year fixed mortgage rate near 4.0%, more consumers are renting than buying their own homes, reflecting a tight credit market. Over the long term, we believe the housing market is on track for meaningful growth, with the eventual prospect of reduced inventory levels for new and existing homes available for sale. For 2012, however, we believe the key factors that usually drive a stronger housing market are not yet present. Specifically, we think buyers’ confidence is still relatively depressed, given job risks and available mortgage credit from lenders. A better balance of new and existing homes available for sale and an easing from foreclosed properties are also likely necessary.

We see sales of home furnishings rising at a low single-digit rate in 2012, though not all segments of the market will experience similar growth. While most consumers are deleveraging and paying down their debt, we believe that some of the more affluent ones have been hardly affected by the slow economy. Thus, we believe the high end of the home furnishings market will continue to outperform the industry, as will the lower-priced segment, as some customers trade down.

In this challenging environment, we believe 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 Our fundamental outlook for the household appliances sub-industry is negative. We expect low single-digit revenue growth in 2012. Even though the US economy is recovering, we think consumers will be reluctant to make major discretionary purchases. We are concerned about an economic slowdown in Europe amid sovereign debt issues and governmental austerity plans. In addition to soft demand, we see increased competition from less expensive imports. Therefore, we think operating margins will be pressured by rising commodity prices, as appliance makers will be unlikely to pass on the higher material costs. We believe worldwide unit demand for major appliances will rise at a low single-digit rate in 2012, led by about 2%–5% growth in both Latin America and Asia. Elsewhere, we project flat unit growth in the US and a 5% decline in Europe.

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. We believe increased competition compounded by our forecast of higher prices of plastic materials will hurt operating margins in 2012.


INDUSTRY PROFILE

Here’s to a better industry outlook

Although the appliance and home furnishing industries have similar customer bases and exposure to consumer discretionary spending, their industry structures and competitive environments are markedly different. 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.

For both industries, traditional retail outlets (full-service department stores and multi-brand furniture and appliance stores) continue to ring up the most sales. 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, albeit at a slower pace.

HOUSEHOLD FURNISHINGS

All furniture manufacturers and retailers should be congratulated for surviving the worst recession in decades in 2009 and for repositioning their businesses for the gradual improvement we see in 2012 and beyond. Across the major categories of bedding, upholstery, and case goods, we believe furniture companies are trying to innovate with new product designs that offer consumers quality and good value at competitive prices.

Total furniture and bedding sales for 2011 were estimated at $79.9 billion, up 1.8% from $78.5 billion in 2010. This followed a 3.9% increase in 2010, according to estimates from the US Department of Commerce and Furniture Today. The largest sales categories in 2011 were stationary sofas and sofa sleepers, which accounted for 15% of total retail sales, followed by bedding at 14%, and master bedroom furniture at 11%.

The industry is projected to grow 20.1% in total sales by 2016, according to market research from Furniture Today, a weekly print and online publication, and Easy Analytic Software Inc. (published December 26, 2011). We see demand gradually strengthening in 2012 as the economy improves modestly.

In a survey conducted by Furniture Today in May 2011, bedding was the top household furnishings category that those surveyed planned to buy in 2011 (10.8%), followed by the stationary sofa category (7.9%) and reclining chair (4.6%). In our view, 2011 and 2012 can be viewed as a transitional period, where consumers freshen up a room, versus redoing the entire room or several rooms with an interior designer.

According to the latest available data from Furniture Today, the top 20 US furniture manufacturers and importers accounted for $10.01 billion in sales in 2011. Sales for the top 20 were 4.7% higher than in 2010.

Table B10: Furniture & bedding sales by segment

FURNITURE AND BEDDING SALES BY SEGMENT(In millions of dollars)

2011 % OF

SALES TOTAL

Stationary sofas/sofa-sleepers 12.1 15Bedding 11.4 14Master bedroom 8.4 11Formal dining furniture 5.4 7Entertainment furniture 5.2 6Home office furniture, incl. desks 5.1 6Youth, other adult bedroom 4.7 6Outdoor furniture 3.8 5Occasional tables 4.2 5Casual dining 4.1 5Reclining chairs 3.7 5Motion sofas 3.6 5Futons 1.7 2Stationary chairs 1.7 2Curios 1.4 2Swivel, glider rockers 1.2 2Infant furniture 1.0 1Other 1.2 2

Total 79.9 100Source: Furniture Today.


APPLIANCES

Unit shipments of major kitchen and other household appliances in North America totaled 60.9 million in 2011, down 1.0% from 61.5 million in 2010, according to the Association of Home Appliance Manufacturers (AHAM), an industry trade group. S&P Capital IQ thinks that shipments in 2011 decreased from 2010 due to a sluggish economic recovery and the end of the government’s “Cash for Appliances” stimulus program, which ended in late 2010 in some states. Under this program, homeowners could trade inefficient appliances for new Energy Star–certified replacements. In 2012, we expect North American appliance shipments to be flat, given the ongoing economic concerns, as consumers are still shying away from large purchases and are looking to buy cheaper imports from emerging countries.

As of May 2012, Standard & Poor’s Economics (which operates separately from S&P Capital IQ) was forecasting that US real GDP would increase 2.1% in 2012 and 2.4% in 2013, versus increases of 1.7% and 3.0% in 2011 and 2010, respectively. The

consumer price index (CPI) is another important benchmark for the appliance industry. Standard & Poor’s economists were estimating a 2.2% increase in the CPI in 2012 and a 1.7% increase in 2013, versus increases of 3.1% and 1.6% in 2011 and 2010, respectively.

In the US, four companies—Whirlpool Corp. (including Maytag), AB Electrolux (Frigidaire), General Electric Co. (GE), and LG Electronics—dominate the core appliance market, which comprises washers, dryers, refrigerators, freezers, dishwashers, and freestanding and built-in ranges.

According to a report published in December 2011

on major household appliance manufacturing in the US from IBISWorld, an independent research company, Whirlpool Corp. had 43.8% of the US market; followed by AB Electrolux (through its Frigidaire brand), with 20.7%; General Electric Co., with 17.1%; and LG Electronics, with 9.2%. These four companies accounted for 90% of total US appliance shipments. No other appliance maker has more than 2% market share for US appliance shipments.

TABLE B04: US SHIPMENTS OF MAJOR HOUSEHOLD APPLIANCES†

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

% CHG.

2000 2008 2009 R2010 2011 R2010-11

Kitchen appliances, total 43,456 42,276 37,668 38,975 38,525 (1.2)Cooking, total 20,846 19,288 16,558 16,574 16,465 (0.7)

Electric 5,026 5,106 4,333 4,449 4,318 (2.9)Gas 3,176 2,842 2,599 2,791 2,625 (5.9)Microwave 12,644 11,340 9,626 9,334 9,522 2.0

Food waste disposers 5,485 5,510 5,220 5,320 5,488 3.2Automatic dishwashers 5,827 5,995 5,403 5,711 5,535 (3.1)Trash compactors 118 74 47 44 41 (6.8)Freezers 1,963 2,098 2,043 1,957 2,015 3.0Refrigerators 9,217 9,310 8,397 9,369 8,981 (4.1)

Laundry appliances, total 14,070 15,265 14,349 14,556 13,733 (5.7)Automatic washers 7,495 8,292 7,865 8,000 7,586 (5.2)Dryers 6,575 6,973 6,484 6,551 6,147 (6.2)

Home comfort, total 7,471 10,644 7,486 7,970 8,624 8.2Room air conditioners 6,496 9,086 5,786 6,418 7,256 13.1Dehumidifiers 975 1,558 1,700 1,552 1,368 (11.9)

Total appliances 64,997 68,184 59,503 61,501 60,882 (1.0)†Includes shipments for the US market, whether imported or domestically produced.R-Revised. Note: Totals may not add due to rounding and overlapping categories.Source: Association of Home Appliance Manufacturers.

TABLE B02: LEADING US FURNITURE MANUFACTURERS

LEADING US FURNITURE MANUFACTURERS(Ranked by 2011 furniture revenues)

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

COMPANY 2010 2011 % CHG.

1. Ashley 3,032.0 3,338.3 10.12. La-Z-Boy 919.0 975.0 6.13. Furniture Brands Int'l. 981.9 932.9 (5.0)4. Klaussner 490.0 490.0 0.05. Dorel 442.7 450.5 1.8

6. Sauder Woodworking 430.0 430.0 0.07. Lacquer Craft 397.9 376.9 (5.3)8. Ethan Allen 322.3 344.8 7.09. Flexsteel 306.7 308.3 0.5

10. Man Wah Holdings 258.4 276.9 7.2

11. Bernhardt 249.0 274.0 10.012. L&P Consumer Products 219.8 242.2 10.213. Lexington Home Brands 209.6 236.9 13.014. Hooker 204.7 213.6 4.415. Home Meridian Int'l. 188.1 212.9 13.2

16. Best Home Furnishings 182.7 195.6 7.017. Franklin 186.1 190.1 2.118. Natuzzi 218.1 185.6 (14.9)19. Bassett 173.6 173.7 0.120. Bush Furniture 150.4 164.9 9.7

Source: Furniture Today.


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

Household durables 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 Demand for new houses has been tempered by the slower rate of household formation in the past few years. According to data in the 2010 US Census, the number of US household formations for the three years ended March 2010 was less than the long-term average by around 2.3 million units. We believe 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 26.4% of the US population, according to 2010 US Census data. This group is now approaching retirement (the oldest started turning 65 in 2011). According to Pew Research Center, a research and information firm, over 10,000 baby boomers will reach retirement age each day for the next 18 years. As baby boomers get older, we expect the death rate to rise, thus reducing the rate of household formation. Additionally, we believe 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 2010 census data, 21.6% of adults between the ages of 25 and 34 live in a multigenerational household, up significantly from 11.0% in 1980. The trend has been more prominent for young adults, who are moving in with their parents, who are likely to support their child with additional income. In a study conducted by the Pew Research Center in March 2012, nearly eight-in-10 (77%) of these 25- to 34-year-olds who live with their parents stated that they lack financial resources to lead the kind of life they want.

Retirement of baby boomers begins 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 65 this year and are beginning to retire. The fact that retirees might spend more money than they earn is one reason Standard & Poor’s economists expect the US savings rate to remain well below its historical average (which is about 8%). In our opinion, affluent retirees will spend more, while less fortunate persons may continue to work through the normal retirement age, which spans 62 to 65.

According to the Federal Deposit Insurance Corp.’s latest Quarterly Banking Profile for the first quarter of 2012, home equity lines of credit decreased 2.2% sequentially and 5.4% year over year, 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 stabilize as the economy improves and banks’ balance sheets continue to recover. That said, the current environment is not overly encouraging to strong consumer spending for home improvement appliance upgrades or shopping for home furnishings, in our view.

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 36.5% 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.

The negative effect of the aging of baby boomers 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 believe 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. However, we believe there is a pent-up demand for houses, and it will be seen once the economy starts showing signs of recovery.

Housing starts/homeownership rates As noted earlier, the housing starts numbers are beginning to show a modest growth, though fueled mostly by multifamily units. The US Department of Commerce’s New Residential Construction report covers housing starts, permits, and completions. The update released in April 2012 showed the month’s housing starts rate for units in buildings with five units or more was 217,000 (seasonally adjusted annual rate, or SAAR), up 90.4% from April 2011. According to a forecast made in February 2012 by the National Association of Home Builders (NAHB), multifamily housing starts are expected to increase over 24%, year over year, to 208,000 units in 2012.

Because consumers face strict credit guidelines, owning a home remains a dream for many. According to the US Census Bureau, the homeownership rate stood at 65.4% in the first quarter of 2012, down from the 66.4% level in the comparable period a year earlier. 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 disparity The income inequality 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 2009 (latest available), the top 5% of the US population earned as much as 21.7% of total income in the US, while the top 20% of the population earned 50.3% (i.e., half of total income).

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

This income disparity worsened during the recent recession and the subsequent economic recovery, with the difference between unemployment rates for those with a bachelor’s degree (or higher) and high school graduates widening. As of April 2012, the unemployment rate for high school graduates stood at 7.9%, while the rate for those with a bachelor’s degree (or higher) was 4.0%.


Another cause of the income disparity is capital gains. 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 One of the most important consequences of the rising income inequality is the bifurcation of consumers. 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, 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 part 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.

As a result, the market is clearly divided into two broad consumer categories: 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. The “willingness to spend” index tracked by Consumer Edge Research, an independent equity research firm, fluctuated widely in the second half of 2011, with consumers’ willingness to spend on everyday and discretionary products reaching a two-year low in October, followed by strong growth in November, when the index reached its highest level since July 2011. In November 2011, the index rose for the first time in seven months. Further, income expectations for the next six months also suggested an improvement. The index for the high-income segment, however, had shown positive signals for most of the year. Further, 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.

As the economy recovers, we believe 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, we believe 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

The 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 excellence 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

US furniture manufacturers 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 150,000 jobs in the past decade.

In 2011, however, total US furniture imports dropped 1% to $21.4 billion, from $21.6 billion in 2010. China still held the No. 1 spot by a wide margin, though falling 3% to $12 billion, which represented over 56% of furniture imports to the US market. Vietnam was a distant second, at $1.7 billion (down 3%). Canada held the third slot, rising 6%, followed by Mexico (up 3%) and Malaysia (down 9%).

Upholstered furniture imports rising US upholstered furniture manufacturers are experiencing similar challenges, with rising imports from lower-cost countries 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. We will review the 2011 sales performance for each of these product categories and the outlook for 2012 as well. 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 2011 sales increased 1.8% to $13.8 billion, according to market research by Furniture Today and Easy Analytic Software. This is a difficult product category to forecast for 2012, in our opinion, with many retailers unsure how strong a recovery there may be during the year. Additionally, some manufacturers think that a sales forecast is harder to predict in a presidential election year. Thus, we are expecting a low-single-digit increase on moderately improving economic conditions.

Leather upholstery. In 2007 and prior years, leather upholstery was a strong growth category, but it did not realize strong sales in either 2008 or 2009: sales declined 5.8% to $7.4 billion in 2009, from $7.8 billion in the prior year. In 2011, estimated sales increased 7.1% to $9.0 billion. Furniture Today reports that orders for leather upholstery have picked up at the wholesale level, mostly due to low inventories at the retail store level. Demand is price-sensitive and, in order to get to below a retail price of $1,000 for a sofa, many suppliers are moving away from all-leather material to leather/vinyl and bonded leather covers. On the other hand, some companies see increased interest in sofas at higher price points of $1,799 and above. We are expecting a low- to mid-single-digit increase for 2012, on moderately improving economic conditions.

Motion upholstery. Some of the market leaders in this product category saw modest growth for their companies in 2011. Furniture Today estimates that motion upholstery sales increased 1.9% in 2011 to $8.5 billion. 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 flat to low-single-digit increase for 2012, given our outlook for slower sales of large TVs.


Case goods imports 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 believe 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. Furniture Today estimates case goods sales rose 1.6% in 2011 to $22.6 billion. For 2012, we estimate mid-single-digit category growth, driven by strong growth in the specialty bedding segment.

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, sales in 2011 increased 2.6% to $11.4 billion.

S&P Capital IQ believes bedding sales will also increase in 2012. We believe higher dollar sales growth estimates suggest that 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 believe 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 multi-vendor 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 believe 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

January 2012, La-Z-Boy had 309 stand-alone La-Z-Boy Furniture Galleries’ stores, 84 of which were company-owned.

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 March 2012, the company had approximately 301 stores, which are called Design Centers. The parent company operates directly 149 design center stores. 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 44 Thomasville Home Furnishing Stores that can be two-thirds higher in store sales than those of third-party retailers. In addition, there were 62 Thomasville dealer-owned stores in operation at March 31, 2012. We believe the stores give Furniture Brands better insight into what consumers prefer.

To be sure, single-vendor stores do 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.

Table B01: LEADING US DEDICATED FURNITURE RETAILERS

LEADING US DEDICATED FURNITURE RETAILERS(Ranked by 2011 sales of furniture and bedding)

NO. OF STORES WITH

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

COMPANY 2010 2011 % CHG. 2010 2011

1. Ashley Furniture HomeStores 2,394 2,686 12.2 422 4342. IKEA 2,095 2,280 8.8 37 383. Rooms To Go 1,410 1,500 6.4 123 1254. Williams-Sonoma 1,400 1,480 5.7 576 5605. Berkshire Hathaway* 1,146 1,208 5.5 33 34

6. Raymour & Flanigan 972 1,009 3.8 96 997. American Signature 1,101 966 (12.2) 128 1288. Pier 1 Imports 939 957 1.9 967 9719. Sleepy’s 765 846 10.6 694 809

10. Mattress Firm 597 831 39.2 674 855

11. La-Z-Boy Furniture Galleries 740 820 10.9 278 28112. Crate & Barrel 718 718 0.0 105 10813. Select Comfort 572 714 24.7 386 38114. Ethan Allen 657 695 5.8 215 21015. Bob’s Discount Furniture 585 639 9.3 40 43

16. Havertys 620 621 0.1 118 11917. Restoration Hardware 410 515 25.6 104 9218. Art Van 430 470 9.3 36 6819. Slumberland 370 384 3.7 117 12320. Sleep Train 313 372 18.6 231 251

21. Mathis Brothers 321 345 7.5 8 822. Cost Plus World Market 310 332 7.1 263 25823. American Furniture Warehouse 300 323 7.7 11 1224. Badcock Home Furniture 315 305 (3.2) 315 31525. America’s Mattress 249 276 10.6 385 351

*Furniture division.Source: Furniture Today.


Specialty retailers and discounters alter distribution landscape Sears, Roebuck and Co. (now Sears Holdings Corp., which also owns Kmart), still dominates the US appliance retailing industry. Bolstered by its wide range of brands and models (including its own Kenmore brand, which is made by Whirlpool Corp.), Sears picked up market share in recent years when a number of other retailers exited the business. However, Sears faces less traffic and newer competitors that are strong contenders, such as Lowe’s Companies Inc. and Home Depot Inc., the second and third largest appliance retailers, respectively.

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

As home sales slow and consumers reduce their spending, 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. 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. Many of the features found in the best appliances have been adapted by some of these upscale suppliers 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 at hand. Second, appliances with features formerly deemed as high-end are now available to the masses. Third, the frills of luxury living aside, we believe 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 Appliance makers have been adding more features to their products to add perceived value and to distinguish their products from those of competitors. As a result, today’s washing machine has evolved considerably from the first automatic washer, introduced by Maytag in 1949.

In recent years, 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 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.

Many manufacturers boast that their latest models’ sophisticated automatic configurations reduce the amount of user input required to operate them. Whirlpool’s Cabrio washers have a Direct Inject wash system, which cleans large loads with a shot of concentrated detergent to eliminate the need for pre-treating stains. The washer also detects the size of the load and chooses the water level, speed of the wash, and amount of time needed to clean the clothes. The Stain Inspector system offered in GE’s Harmony king-size washer automatically treats 65 common stains.

Recent product launches have taken further strides toward marrying laundry appliances with state-of-the-art technology. In August 2010, LG Electronics launched a SmartDiagnosis 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. Also in August, Whirlpool announced a similar system—called Kenmore Connect—which will be equipped in Kenmore’s Elite-brand washers.

Washers and dryers are not the only appliances that are 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 2008 Consumer Electronics Show in Las Vegas, Whirlpool announced its Clio Vu refrigerator, which contains a convertible tablet computer that helps clear refrigerators of sticky notes, traditional notepads, and calendars, while keeping grocery lists and schedules organized. The Clio Vu, equipped with Wi-Fi (wireless technology used in mobile phones, home networks, video games, etc.), can be easily removed from the digital hub and brought on the next grocery trip. This device comes preloaded with Whirlpool’s Cozi family organization software.

In August 2010, Miele announced a platform that uses Apple devices (such as the iPhone and iPad) to monitor a full range of its home appliances, including the washing machine, dryer, dishwasher, refrigerator, and cooking devices. The InfoControl Plus app enables numerous functions, such as allowing users to check the status of their appliances and even switch them on and off. Alerts include user-friendly messages, such as that a refrigerator door has been left open or that the roast in the oven is due to be basted.

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 in recent years, thanks largely 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 While technology buffs and luxury consumers simply want better functionality, increased capacity, shorter function times, convenience, and reduced noise are strong selling points for major appliances. 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 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.

The company 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 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 decors, 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 offers over 20 settings and was available for $1,099 at retail as of June 2012. 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, is available for about $429 at retail as of June 2012.

What else has come through the pipeline? More appliance advances might be on the way. In 2010, Whirlpool announced new Eco Kitchen appliances that are the most energy-efficient kitchen appliances produced by the company. According to the US Department of Energy, lighting, refrigeration, and cooking account for about 41.5% of a home’s energy consumption. Conserving water, energy, and costs, Whirlpool’s Eco Kitchen includes the Resource Saver refrigerator, Resource Saver dishwasher, Velos SpeedCook oven, and Energy Save oven range. Whirlpool also introduced convection baking and indoor grilling features in a microwave that delivers cooking results 30% faster than a traditional oven.

In September 2010, Miele announced a new line of dishwashers with a high-temperature final rinse that meets stricter hygiene requirements and, hopefully, will 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.

General Electric’s GE Café series, introduced in 2008, contains professionally styled appliances, with the look and feel of a modern stainless steel restaurant kitchen, combined with the latest cooking advantages available. A range sells for above $2,800 and a dishwasher for $959 at retail, as of June 2012.

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 won’t pool on top.

In late 2009, GE Appliance launched Energy Star (US Department of Energy standard) residential water heaters 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 ovens, ranges, and cook tops. High-net-worth consumers rated these three appliance makers as the most prestigious home appliance brand 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 US companies like Whirlpool traditionally 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. However, to remain competitive, Asian firms are outsourcing to places with even lower costs. LG, for example, manufactures only high-end products in Korea, with half of all its appliances made at lower-cost plants in China. Recently, industry news stories pointed to a shortage of skilled labor in China for appliance makers. We believe this is only a short-term problem.

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 frontload 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 we think that near-term growth will turn negative (i.e., the market will decline by 5%). Whirlpool expects industry unit volumes to decline in the range of 2% to 5% for full-year 2012, when compared with the previous year.

In terms of fragmentation, Europe’s appliance manufacturing industry is beginning to resemble the US industry, 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 believe 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 2012, 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. In 2007, Arcelik, a Turkish appliance maker, acquired Changzhou Casa Shinco Electrical Appliances Co. Ltd. as part of its strategy to expand in China. Whirlpool sees Asia’s industry unit volume up by 2%–4% for full-year 2012.

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. However, in


the first quarter of 2012, Whirlpool experienced growth of 3% in sales. Whirlpool expected its Latin America business to grow in a range of 2% to 5% for full-year 2012.

HOW THE INDUSTRY OPERATES

Although household furnishings have been part of domestic life for a millennium, the business of making and selling these goods on a large scale is a recent 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, coffee machines, etc.) 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 fairly 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 includes 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, R&D spending can be reduced 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 $500 million–$550 million in 2012, in support of its investment in innovative product technologies and its global operating platform initiatives. Whirlpool’s capital expenditures totaled $593 million and $608 million in 2010 and 2011, respectively. In our opinion, the projected capital spending in 2012 is slightly below the capital outlays of the last two years.

Distribution Finished appliances are usually shipped to regionally based 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. In recent years, 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 believe 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.

Demand for appliances can vary from year to year depending on replacement demand, housing starts, general economic conditions, and saturation levels. 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 recession, 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 some purchases can be deferred or accelerated, broken or worn-out appliances usually must be replaced quickly. Just as appliances’ expected life spans differ by category, an appliance manufacturer’s exposure to replacement demand depends on its product mix.

Other factors that encourage replacement are home remodeling and existing home sales. 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 believe 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. This implies that, 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. As of September 16, 2009, 197 countries had ratified the Montreal Protocol. 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 and the US Environmental Protection Agency 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 Department of Energy.

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

The furniture market’s primary segments consist of case goods and upholstered furniture, bedding and floor coverings. 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 believe 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 Sealy Corp., Serta Inc., Simmons Co., and Tempur-Pedic.

Ready-to-assemble (RTA) furniture. Ready-to-assemble 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 believe carpet and rug industry are 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 in recent years. 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 are experiencing now negatively impacts 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 believe 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, US furniture manufacturers may be acquired by large Asia-based peers, particularly those in China.

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. The 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% to 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. We believe 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, Target, Staples, Costco, and Sam’s Club were all in the top-10 category of US furniture and bedding retailers in 2009, according to the 2009 Home Furniture Retailers Survey by 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 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 dominate the core US appliance market (refrigerators and freezers, electric and gas ranges, dishwashers, and clothes washers and dryers). These two companies—General Electric Co. and Whirlpool Corp. (including Maytag)—accounted for about 61% of US industry volume in 2011, according to IBISWorld, a market research firm. Europe’s largest appliance manufacturer, AB Electrolux, had an estimated 21% share of the US market in 2011 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. In recent years, 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 2008, the top European appliance manufacturers were BSH Bosch und Siemens Hausgeräte Co. (based in Germany), AB Electrolux (Sweden), Indesit Company S.P.A. (Italy), Arçelik Anonim Sirketi (Turkey), and Fagor Electrodomésticos (Spain).

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 believe 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 and the US Department of Housing and Urban Development, 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 2011, housing starts (including single-family and multi-dwelling units) increased 4.3%, year over year, following a 5.6% increase in 2010 and a 38.4% decline in 2009. As of May 2012, Standard & Poor’s Economics (which operates separately from S&P Capital IQ) was projecting that housing starts would rise to 721,700 units in 2012 and 988,400 units in 2013, from 610,100 units in 2011.

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. The average yield was 0.2% in 2009, 1.4% in 2008, and 4.4% in 2007. As of May 2012, Standard & Poor’s Economics was projecting yields to average 0.1% in both 2012 and 2013. As a rough proxy for mortgage rates, its current outlook for 30-year government bonds calls for a decrease to 3.2% in 2012 (from 3.9% in 2011) and then an increase to 3.7% in 2013.

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 Department of Commerce, 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 grew 1.7% in 2011, down from 3.0% growth in 2010, which followed a 2.6% decline in 2009. In 2011, the economy started out slowly in the first quarter of the year, but strengthened over the rest of the year, reflecting the improving job and global financial outlook. As of May 2012, Standard & Poor’s

Economics was forecasting that real GDP would grow 2.1% in 2012 and 2.4% in 2013.

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 3.8% in 2011 and 3.6% in 2010, following a 0.7% gain in 2009, and a 1.3% increase in 2008. As of May 2012, Standard & Poor’s Economics was projecting growth of 3.1% in both 2012 and 2013.

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. The index, which registered 65.6 in January 2011, increased to 72.0 in February, but then fell to 63.4 in March. Things deteriorated later in the year, with the index dropping to 46.4 in September and 39.8 in October. The Present Situation Index, which was 32.5 in January, rose to 33.8 in February, then to 36.9 in March. However, in September it dropped to 33.3 and then to 26.3 in

CHART H03: CONSUMER FURNITURE DEMAND & DISPOSABLE INCOME

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

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1993 1995 1997 1999 2001 2003 2005 2007 2009 20110

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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.

CONSUMER CONFIDENCE VS. FURNITURE & APPLIANCE STORE SALES

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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.Sources: The Conference Board; US Department of Commerce.


October. The Expectations Index was 87.6 in January, rebounded to 97.5 in February, before falling to 81.1 in March. In September, the index dropped to 55.1 and then to 48.7 in October.

In April 2012, the consumer confidence index fell slightly to 69.2, from 69.5 in March 2012. The Present Situation Index improved to 51.4 from 49.9 in March, while the Expectations Index declined to 81.1 from 82.5 in March.

The Conference Board said, “Consumer confidence was virtually unchanged in April, following a modest decline in March. As was the case last month, the slight dip was prompted by a moderation in consumers’ short-term outlook, while their assessment of current conditions continued to improve. Overall, consumers are more upbeat about the state of the economy, but they remain cautiously optimistic.” Standard & Poor’s Economics believes that although labor market conditions have improved slightly, consumers remain concerned about their jobs and their income.

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 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 believes prospects for future profit growth are paramount in determining a company’s worth. Common valuation measurements include multiples of earnings per share 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.

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. In 2010, the three largest discounter chains in the US were Wal-Mart Stores Inc., Target Corp., 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 immediately 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 December 31, 2010, 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 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 Network) 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

BIGresearch http://www.bigresearch.com Market intelligence firm that gathers consumer market information from a survey community of more than 60 million online consumers.

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.

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 http://www.bea.gov Federal agency that collects economic data.

US Census Bureau 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 (2001 = 100)

Ticker Company Yr. End 2011 2010 2009 2008 2007 2006 2001 10-Yr. 5-Yr. 1-Yr. 2011 2010 2009 2008 2007

HOME FURNISHINGS‡ETH § ETHAN ALLEN INTERIORS INC JUN 679.0 A 590.1 A 674.3 A 980.0 A 1,005.3 A 1,066.4 A 904.1 (2.8) (8.6) 15.1 75 65 75 108 111LZB § LA-Z-BOY INC # APR NA 1,187.1 1,179.2 1,226.7 1,450.9 1,617.3 D 2,154.0 NA NA NA NA 55 55 57 67LEG [] LEGGETT & PLATT INC DEC 3,636.0 3,359.1 3,055.1 D 4,076.1 D 4,306.4 A,C 5,505.4 A 4,113.8 A (1.2) (8.0) 8.2 88 82 74 99 105MHK † MOHAWK INDUSTRIES INC DEC 5,642.3 5,319.1 5,344.0 6,826.3 7,586.0 7,905.8 3,445.9 C 5.1 (6.5) 6.1 164 154 155 198 220TPX † TEMPUR PEDIC INTL INC DEC 1,417.9 1,105.4 831.2 927.8 1,106.7 945.0 221.5 20.4 8.5 28.3 640 499 375 419 500

HOUSEHOLD APPLIANCES‡HELE § HELEN OF TROY LTD # FEB 1,181.7 A 777.0 A 647.6 A 622.7 A 652.5 A 634.9 451.2 10.1 13.2 52.1 262 172 144 138 145IRBT § IROBOT CORP DEC 465.5 401.0 298.6 307.6 249.1 189.0 NA NA 19.8 16.1 ** ** ** ** NAWHR [] WHIRLPOOL CORP DEC 18,666.0 18,366.0 17,099.0 18,907.0 19,408.0 18,080.0 A,C 10,343.0 6.1 0.6 1.6 180 178 165 183 188

OTHER COMPANIES WITH SIGNIFICANT HOUSEHOLD DURABLES OPERATIONSKNL KNOLL INC DEC 922.2 809.5 780.0 1,120.1 1,055.8 A 982.2 NA NA (1.3) 13.9 ** ** ** ** NAZZ SEALY CORP NOV 1,230.2 1,219.5 D 1,290.1 1,498.0 1,702.1 1,582.8 1,196.7 A,C 0.3 (4.9) 0.9 103 102 108 125 142TPX † TEMPUR PEDIC INTL INC DEC 1,417.9 1,105.4 831.2 927.8 1,106.7 945.0 221.5 20.4 8.5 28.3 640 499 375 419 500

Note: Data as originally reported. CAGR-Compound annual growth 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 following 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 fiscal year change.

Net Income

Million $ CAGR (%) Index Basis (2001 = 100)

Ticker Company Yr. End 2011 2010 2009 2008 2007 2006 2001 10-Yr. 5-Yr. 1-Yr. 2011 2010 2009 2008 2007

HOME FURNISHINGS‡ETH § ETHAN ALLEN INTERIORS INC JUN 29.3 (44.3) (52.7) 58.1 69.2 85.7 79.7 (9.5) (19.3) NM 37 (56) (66) 73 87LZB § LA-Z-BOY INC # APR NA 24.0 32.5 (121.3) (7.5) 19.8 61.8 NA NA NA ** 39 53 (197) (12)LEG [] LEGGETT & PLATT INC DEC 153.3 177.4 117.9 122.9 51.0 300.3 187.6 (2.0) (12.6) (13.6) 82 95 63 66 27MHK † MOHAWK INDUSTRIES INC DEC 173.9 185.5 (5.5) (1,458.2) 706.8 455.8 188.6 (0.8) (17.5) (6.2) 92 98 (3) (773) 375TPX † TEMPUR PEDIC INTL INC DEC 219.6 157.1 85.0 58.9 141.5 112.3 11.9 33.9 14.4 39.7 1,852 1,325 717 496 1,193

HOUSEHOLD APPLIANCES‡HELE § HELEN OF TROY LTD # FEB 110.4 93.3 71.8 (56.8) 61.5 50.1 29.2 14.2 17.1 18.3 378 319 246 (194) 211IRBT § IROBOT CORP DEC 40.2 25.5 3.3 0.8 9.1 3.6 NA NA 62.3 57.5 ** ** ** ** NAWHR [] WHIRLPOOL CORP DEC 390.0 619.0 328.0 418.0 647.0 486.0 34.0 27.6 (4.3) (37.0) 1,147 1,821 965 1,229 1,903

OTHER COMPANIES WITH SIGNIFICANT HOUSEHOLD DURABLES OPERATIONSKNL KNOLL INC DEC 58.0 28.0 27.4 84.9 71.4 58.6 NA NA (0.2) 107.0 ** ** ** ** NAZZ SEALY CORP NOV (5.7) 24.7 13.5 (2.9) 79.4 74.3 (20.3) NM NM NM NM NM NM NM NMTPX † TEMPUR PEDIC INTL INC DEC 219.6 157.1 85.0 58.9 141.5 112.3 11.9 33.9 14.4 39.7 1,852 1,325 717 496 1,193

Note: Data as originally reported. CAGR-Compound annual growth 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 following 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 2011 2010 2009 2008 2007 2011 2010 2009 2008 2007 2011 2010 2009 2008 2007

HOME FURNISHINGS‡ETH § ETHAN ALLEN INTERIORS INC JUN 4.3 NM NM 5.9 6.9 4.6 NM NM 7.4 8.6 10.8 NM NM 14.8 16.7LZB § LA-Z-BOY INC # APR NA 2.0 2.8 NM NM NA 4.0 5.6 NM NM NA 6.8 10.0 NM NMLEG [] LEGGETT & PLATT INC DEC 4.2 5.3 3.9 3.0 1.2 5.2 5.9 3.8 3.4 1.2 10.9 11.6 7.4 6.5 2.3MHK † MOHAWK INDUSTRIES INC DEC 3.1 3.5 NM NM 9.3 2.8 3.0 NM NM 8.4 5.2 5.7 NM NM 16.8TPX † TEMPUR PEDIC INTL INC DEC 15.5 14.2 10.2 6.3 12.8 28.4 23.1 13.2 8.1 18.5 280.1 105.4 69.5 97.6 108.2

HOUSEHOLD APPLIANCES‡HELE § HELEN OF TROY LTD # FEB 9.3 12.0 11.1 NM 9.4 8.2 9.0 8.7 NM 6.8 14.9 14.7 13.1 NM 11.2IRBT § IROBOT CORP DEC 8.6 6.4 1.1 0.2 3.6 13.7 11.2 1.8 0.5 6.0 19.2 16.6 2.6 0.7 8.8WHR [] WHIRLPOOL CORP DEC 2.1 3.4 1.9 2.2 3.3 2.5 4.0 2.3 3.0 4.6 9.3 15.7 9.8 12.1 18.0

OTHER COMPANIES WITH SIGNIFICANT HOUSEHOLD DURABLES OPERATIONSKNL KNOLL INC DEC 6.3 3.5 3.5 7.6 6.8 8.4 4.2 4.0 12.0 10.6 39.8 26.0 40.8 142.3 180.6ZZ SEALY CORP NOV NM 2.0 1.0 NM 4.7 NM 2.5 1.4 NM 7.8 NA NA NA NA NA TPX † TEMPUR PEDIC INTL INC DEC 15.5 14.2 10.2 6.3 12.8 28.4 23.1 13.2 8.1 18.5 280.1 105.4 69.5 97.6 108.2

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 following calendar year.

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


HOME FURNISHINGS‡ETH § ETHAN ALLEN INTERIORS INC JUN 1.7 1.8 2.2 2.3 2.6 36.3 42.7 39.9 33.5 31.5 144.9 175.0 145.9 116.2 86.3LZB § LA-Z-BOY INC # APR NA 3.3 2.9 2.8 2.6 NA 7.7 12.1 14.5 18.1 NA 10.0 16.7 23.5 37.8LEG [] LEGGETT & PLATT INC DEC 2.1 2.3 2.3 2.5 2.3 38.1 32.6 33.0 33.5 31.5 130.6 109.5 116.3 108.8 96.7MHK † MOHAWK INDUSTRIES INC DEC 2.2 2.1 2.7 2.6 2.0 24.0 26.3 33.5 34.2 27.5 92.5 108.6 122.1 135.8 163.3TPX † TEMPUR PEDIC INTL INC DEC 2.1 1.9 1.5 1.7 2.6 91.4 72.0 59.5 80.6 88.6 298.0 325.0 410.5 509.2 300.9

HOUSEHOLD APPLIANCES‡HELE § HELEN OF TROY LTD # FEB 1.3 1.4 3.4 2.3 3.3 17.0 20.1 18.3 20.8 27.2 159.6 146.5 51.6 59.8 76.7IRBT § IROBOT CORP DEC 3.3 2.7 2.5 3.1 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 1.2 1.2 1.1 1.1 33.7 34.2 40.6 39.4 29.5 NM 188.3 230.8 416.2 252.0

OTHER COMPANIES WITH SIGNIFICANT HOUSEHOLD DURABLES OPERATIONSKNL KNOLL INC DEC 1.4 1.4 1.4 1.3 1.5 49.6 57.7 70.0 80.9 74.6 259.3 353.8 487.0 517.0 426.2ZZ SEALY CORP NOV 2.2 2.0 1.7 1.2 1.1 111.3 112.3 114.7 124.7 116.1 425.8 470.0 530.6 NM NMTPX † TEMPUR PEDIC INTL INC DEC 2.1 1.9 1.5 1.7 2.6 91.4 72.0 59.5 80.6 88.6 298.0 325.0 410.5 509.2 300.9



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

Ticker Company Yr. End 2011 2010 2009 2008 2007 2011 2010 2009 2008 2007

HOME FURNISHINGS‡ETH § ETHAN ALLEN INTERIORS INC JUN 25 - 12 NM - NM NM - NM 17 - 6 18 - 12 20 NM NM 43 36 1.6 - 0.8 1.6 - 0.8 11.7 - 4.7 7.6 - 2.5 3.0 - 2.0LZB § LA-Z-BOY INC # APR NA - NA 34 - 14 18 - 1 NM - NM NM - NM NA 0 0 NM NM 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 4.7 - 0.9 7.5 - 2.6LEG [] LEGGETT & PLATT INC DEC 26 - 17 21 - 15 29 - 14 34 - 16 88 - 61 105 91 138 137 279 6.2 - 4.1 5.9 - 4.2 10.2 - 4.8 8.3 - 4.1 4.6 - 3.2MHK † MOHAWK INDUSTRIES INC DEC 27 - 16 25 - 16 NM - NM NM - NM 10 - 7 0 0 NM NM 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0TPX † TEMPUR PEDIC INTL INC DEC 23 - 12 18 - 11 22 - 3 33 - 6 21 - 11 0 0 0 30 17 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 4.8 - 0.9 1.5 - 0.8

HOUSEHOLD APPLIANCES‡HELE § HELEN OF TROY LTD # FEB 10 - 7 10 - 7 11 - 4 NM - NM 15 - 8 0 0 0 NM 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0IRBT § IROBOT CORP DEC 26 - 15 25 - 14 NM - 54 NM - NM 66 - 34 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 18 - 9 15 - 9 19 - 4 18 - 5 14 - 9 38 21 39 31 21 4.3 - 2.1 2.4 - 1.5 9.0 - 2.0 5.7 - 1.8 2.4 - 1.5

OTHER COMPANIES WITH SIGNIFICANT HOUSEHOLD DURABLES OPERATIONSKNL KNOLL INC DEC 18 - 10 29 - 16 18 - 9 10 - 4 17 - 11 29 20 30 26 30 2.9 - 1.6 1.2 - 0.7 3.4 - 1.6 6.1 - 2.6 2.8 - 1.8ZZ SEALY CORP NOV NM - NM 16 - 9 39 - 3 NM - NM 21 - 13 NM 0 0 NM 34 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 4.6 - 0.6 2.7 - 1.7TPX † TEMPUR PEDIC INTL INC DEC 23 - 12 18 - 11 22 - 3 33 - 6 21 - 11 0 0 0 30 17 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 4.8 - 0.9 1.5 - 0.8


20072011 2010 2009 2008

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


HOME FURNISHINGS‡ETH § ETHAN ALLEN INTERIORS INC JUN 1.02 (1.53) (1.83) 1.98 2.19 8.22 7.37 9.01 9.72 10.29 25.37 - 12.30 25.40 - 12.35 17.62 - 6.98 34.02 - 11.26 39.56 - 25.87LZB § LA-Z-BOY INC # APR NA 0.46 0.63 (2.36) (0.15) NA 6.90 6.55 5.88 7.67 13.85 - 6.76 15.46 - 6.44 11.07 - 0.53 11.76 - 2.11 15.20 - 5.31LEG [] LEGGETT & PLATT INC DEC 1.05 1.17 0.74 0.73 0.28 1.89 2.99 3.16 4.99 7.12 26.95 - 17.80 25.15 - 17.89 21.44 - 10.03 24.59 - 12.03 24.73 - 17.14MHK † MOHAWK INDUSTRIES INC DEC 2.53 2.66 (0.08) (21.32) 10.37 20.87 17.85 14.67 13.25 10.80 68.86 - 39.93 66.93 - 41.33 53.71 - 16.97 83.09 - 23.91 108.00 - 73.40TPX † TEMPUR PEDIC INTL INC DEC 3.27 2.23 1.13 0.79 1.77 (3.90) (2.27) (1.14) (2.50) (2.94) 74.81 - 38.88 41.17 - 23.50 24.43 - 3.84 26.34 - 4.96 37.87 - 19.87

HOUSEHOLD APPLIANCES‡HELE § HELEN OF TROY LTD # FEB 3.52 3.04 2.38 (1.88) 2.01 (1.03) 0.80 7.22 6.66 5.04 36.75 - 23.83 30.46 - 21.00 25.01 - 8.55 24.70 - 13.31 29.26 - 16.32IRBT § IROBOT CORP DEC 1.50 1.00 0.13 0.03 0.37 8.55 6.33 4.84 4.43 4.50 39.00 - 22.46 25.27 - 14.45 17.85 - 7.00 22.42 - 7.17 24.30 - 12.76WHR [] WHIRLPOOL CORP DEC 5.07 8.12 4.39 5.57 8.24 9.17 9.29 1.85 (7.38) 3.91 92.28 - 45.22 118.44 - 71.00 85.01 - 19.19 98.00 - 30.19 118.00 - 72.10

OTHER COMPANIES WITH SIGNIFICANT HOUSEHOLD DURABLES OPERATIONSKNL KNOLL INC DEC 1.25 0.61 0.60 1.82 1.48 (2.74) (3.63) (4.42) (5.34) (4.55) 22.73 - 12.59 17.45 - 9.95 11.00 - 5.33 18.68 - 7.89 24.90 - 15.80ZZ SEALY CORP NOV (0.06) 0.26 0.15 (0.03) 0.87 (4.39) (4.62) (4.98) (5.76) (5.90) 3.06 - 1.09 4.24 - 2.30 5.83 - 0.43 11.87 - 1.62 18.13 - 11.10TPX † TEMPUR PEDIC INTL INC DEC 3.27 2.23 1.13 0.79 1.77 (3.90) (2.27) (1.14) (2.50) (2.94) 74.81 - 38.88 41.17 - 23.50 24.43 - 3.84 26.34 - 4.96 37.87 - 19.87

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 following calendar year. J-This amount includes intangibles that cannot be identified.

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

In this regard, Standard & Poor’s Equity Research Services 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.

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