Housing Bust Wears Out Furniture Makers

A vast array of companies—from homebuilders to home-improvement stores and furniture manufacturers—profited from the U.S. housing boom and then suffered mightily through its bust. Although there is evidence that the U.S. housing market may be stabilizing, such as the latest uptick in construction activity, a revival for some industries built around housing is expected to take much longer.

Results from furniture maker La-Z-Boy (LZB) illustrate the difficulties still plaguing housing-dependent companies. La-Z-Boy shares jumped 19.5% on June 16, to 4.35, after fourth-quarter earnings handily beat analyst predictions. The furniture manufacturer and retailer posted earnings of 10¢ per share in its fourth quarter. Most analysts were expecting a loss larger than the firm's 9¢-per-share loss a year ago.

That's where the good news for La-Z-Boy ends. Its unexpected profits were driven by steep cost-cutting. La-Z-Boy President and Chief Executive Kurt Darrow touted his company's ability to find $60 million in annual cost savings, efforts that include the movement of some furniture production from the U.S. to Mexico.

The bad news is La-Z-Boy's revenue plunged 23% last quarter. Thus, Darrow told analysts June 16: "The real benefit has to come from the consumer having more confidence about the future and shopping more."

An "Incredibly Low" Bottom

Investors are closely watching housing data for any sign the market is stabilizing. On June 16, new data on housing construction bolstered optimism. Housing starts rose 17.2% from April to May, to an annual pace of 532,000. "This is further evidence that the housing market is bottoming out, which is crucial for the rest of the economy," says Bill Hampel, chief economist at the Credit Union National Assn.

In early 2006, construction was being started at a pace above 2.2 million units per year. During previous housing recessions, housing starts bottomed at 800,000, Hampel says, but this housing market is "bottoming out at an incredibly low level" of below 500,000.

"Building activity is likely to be stabilizing at this very low level," says Keith Hembre, chief economist at First American Funds. But he believes a "sharp rebound" for homebuilding is unlikely.

The housing data are not the only signs of hope. Home Depot (HD), a home-improvement retailer closely linked to housing activity, raised its earnings estimates on June 10. One executive said the chain had a "very good May," with strength continuing into June.

However, consumer purchases of larger, expensive items for the home could stay on hold for some time. La-Z-Boy's Darrow said sales volume is a "wild card" that is very hard to predict. "There's no evidence right now that there's a big uptick, but there's also no evidence that it's getting worse," he said.

Look for More Households to Form

It's difficult to forecast when the furniture industry could recover, says Raymond James (RJF) analyst Budd Bugatch. "However, the rate of decline has stabilized somewhat," he wrote June 16. That has allowed La-Z-Boy's cost-cutting to "catch up" with slowing sales and produce larger-than-expected profits, he added.

The key question is when sales will stop falling and actually rise. One driver of sales in housing-related industries would be if more Americans form new households—for example, more young people move out on their own.

The next couple of years could see a jump in household formation rates, Hampel says. "It's a fairly bullish picture for first-time home buyers," he says. Despite a recent uptick, mortgage rates are likely to remain low, while home prices have fallen, making homes more affordable. First-time buyers also can get federal tax benefits in 2009.

That said, economists warn there are plenty of drags on housing-related spending. Though housing starts and home sales data may have already hit bottom, "home prices still have a ways to go," Hembre says. That means Americans—even those not about to move—feel less wealthy as the amount of equity in their homes continues to shrink. "The household sector is still heavily burdened by the debt it took on in the last 10 years," Hampel says.

Another problem is that, even if construction stabilizes, there is still too much supply and not enough demand. That could be exacerbated by new home foreclosures. Says First American's Hembre: "Ultimately the best thing we could see for housing would be for a much more accelerated pace of demand."

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