Furniture Brands Is a Dog

 | Oct 27, 2011 | 10:30 AM EDT
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By 11 p.m. EDT Wednesday, I was ready to prepare my Real Money commentary plus a stock pick, when my computer mouse magically clicked on a story regarding Furniture Brands International (FBN). Are you unfamiliar with Furniture Brands? Good, that tells me that you are a smart investor who can smell a dirty, wet pooch from a mile away.

There are a couple of talking points that are worthwhile to know about Furniture Brands, which together basically tee up the rest of the real life Halloween ghoulish tale of the company. First, the company sells mid-priced furniture through mass market chains, independents, and its own retail store network. With the housing market still in the doldrums and consumer no confidence the norm, a mid-tier brand is not the most fruitful place to situate investable cash. Two, bad retail store leases have plagued Furniture Bands and this situation will likely continue. By plague, think along the lines of the company still having to shell out money to satisfy lease agreements on stores that have been shuttered already. Three, the company from the years that I have covered it has been a picture of mismanagement.

While La-Z-Boy (LZB) was retooling its manufacturing infrastructure and processes Furniture Brands was flopping in the wind on its strategy to get leaner. Ethan Allen (ETH) has completely fine-tuned its business model (free interior design service for example) and is popping out new collections at the speed of the growth in rabbit fertility rates. Furniture Brands, on the other hand, has continued to fiddle around with how its price sensitive products are brought to market.

Here's the tale of the tape:

  • Furniture Brands' stock is down 63% YTD; no reported profits since 2006
  • La-Z-Boy's (LZB) stock up 9% year to date. This fiscal year will mark three years of profits.
  • Ethan Allen's stock is up 27% year to date; this year will be its second consecutive profitable year.

Still, upon reading the comments by Furniture Brands CEO Ralph Scozzafava at the High Point market, Justin Timberlake's "Cry Me a River" tune began playing in my head. Here are a few of them:

  • "From a big-ticket perspective, we've never seen housing rush back."
  • "We need housing and consumer confidence to move.
  • "We're still in a recession."
  • "There's gridlock with housing."
  • "A lot of people are underwater with their mortgages or feel like they're going to take a loss if they sell. So if you don't have sellers, they don't turn into new buyers."
  • "We're not seeing a measurable difference (traffic) from a year ago or earlier in the year, up or down either way."

Those comments would at least bait the unknowing potential investor into thinking that Furniture Brands could represent a comeback kid story if only the macro scene would turn around. As I have said consistently, investing is more than staring at a colorful chart and rationalizing the stock will go up on an "only if" premise -- or, in this case, reasoning that FBN trading at more than a 50% discount to net asset value is a Benjamin Graham-ish diamond in the rough. Investors need to understand the complete picture of any company from past to present.

So let's delve further into the sector's corporate background:

  1. Sales of furniture and home furnishings as measured by the government retail sales report have increased year over year for seven straight months. Ethan Allen just tossed up a solid three months on the board, and La-Z-Boy has stated recently that traffic improved at its retail stores. Yet, here is the CEO of Furniture Brands lowering expectations ahead of its third-quarter earnings release. Someone is wrong in depicting market forces (calling a spade a spade, Furniture Brands is a classic share loser).
  2. Furniture Brands has a credibility issue in its upper ranks. The current CEO was on the Furniture Brands board in June of 2007 before becoming head honcho in early 2008. In February 2008, Furniture Brands was approached by Sun Capital to bring it private for a "substantial premium." Since that announcement went public, and was subsequently rebuffed due to blinding faith in a turnaround plan, Furniture Brands shares are down nearly 80%.

As luck would have it, Furniture Brands plans to announce that it's being bought out next week. But given the structural challenges in the model, I wouldn't bet on that actually happening. Why would another party be interested in a company with subpar brands that are unable to command pricing power? In addition there are contractual obligations that cause cash to exit stage left. For example, the company's higher-end Thomasville brand, numbering 45 stores, has produced six consecutive quarters of same-store sales increases -- but the profits have been nowhere in sight for the overall business.

Furniture is a tricky sector of retail to invest, as there are so many other larger ticket items competing for those precious discretionary consumer dollars (an iPad vs. a new recliner, for example). Like I said a couple of months ago, La-Z-Boy is the pick here in terms of gaining exposure to larger ticket furniture sales and Bed Bath and Beyond (BBBY) is where to look for exposure on the demand for gadgets and for boasting a stellar balance sheet.

Decoding corporate history on a Thursday is good clean livin', if you ask me.

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