High Point - Confidence, Energy, Strong Capital Flow

A Market On The Move!

The weeklong Fall Residential High Point Market was upbeat. The air seemed to be charged with a sense that this is A Market on the Move with new destination showrooms opening left and right and many more under construction, as well as the change of hands of the core of the High Point Markets’ real estate. The purchase of International Market Centers in High Point and Las Vegas by Blackstone Real Estate Partners is creating new confidence and energy. These factors all add up to additional capital flowing into our industry, which we view as an indisputable positive.

We spoke with over 200 industry CEOs and received generally positive reports. The attitude among high-end companies in particular was upbeat. The CEOs we spoke with were enjoying robust traffic and business in this strong economic climate. However, the promotional and mid-priced companies were a bit concerned as they have experienced weak retail sales over the past several months. We observed that those who are winning, despite price point, are the companies that have developed well-honed and consistent value propositions and product niches that create customer loyalty and product enthusiasm.

Quote of the Market #1: “If you’re not wrestling with questions of e-commerce and IT, then you are putting your head in the sand”

In our conversations with industry CEOs several topics came up repeatedly:

• Wayfair/Amazon and E-commerce – Internet behemoths continue to make inroads into the furniture industry and represent the fastest growing segment for many companies. However, e-commerce typically compresses margins, as well as introduces difficulties in delivery, last mile infrastructure, and product returns. Discussions on e-commerce at the high end centered on Perigold and the impact they are making. There continues to be tension between loyalty to existing customers and reaching new customers.
• Retail’s weak several months – The environment is tough in retail, particularly over the past several months. Brick and mortar stores, particularly the smaller independent stores, continue to face challenges.
• Political (White) Noise – After the last two markets were dominated by talk of politics and potential government impacts on the industry, this market seemed free of political charge. Though many small business owners are hoping for lower tax bills if the new policy proposals take hold.

The Mergers & Acquisition market remains strong. There is a compelling balance of buyers and sellers across the industry. We continue to see four major areas of activity:

• Asian Investors are seeking to invest in the dollar (exiting the RMB and other Asian currency). This is leading to interest both in companies with strong brand names that can be exported as well as in companies with US manufacturing facilities. The emphasis in both cases is weighted towards tangible assets.
• Private Equity money is being unleashed as the appeal of the furniture industry has accelerated. Active PE firms in the space have purchased companies that appear ripe to be platform companies. Add-on acquisitions should be anticipated over the coming years.
• Strong companies are getting stronger and looking for growth. A perfect example of this is Hooker which has reported impressive earnings and stock price increases this quarter after the acquisition of Home Meridian in Q1 of last year and Shenandoah Furniture in Q3 of this year. Acquisitions are proving out as viable and attractive paths to profitable growth.
• Blending of market channels is accelerating with hospitality, commercial and residential segments blurring. The BDNY show in 3 weeks will showcase this trend.

These are exciting times to be in the industry. Give us a call if you would like to discuss valuation or a transaction in this fast paced and open environment.

Quote of the Market #2: "The best salesman in the world is the best listener in the world”