Sector financial performance:

This company, who is primarily a designer, manufacturer, and retailer of home furnishing products including upholstered and wood furniture, has been grouped into furniture – manufacture& retail sector in furnishing industry.

Demand, from stores-based consumers, for the products of companies in sector has been weak since 2016 and started to decline in 2018,  which is consistent with the performance of furniture companies in other sectors and may present a general result of slowing down traffic in retail stores as indicated by significant decrease (or slower growth) in comparable sales of those companies’ stores during the same period of time (the typical annul growth in comparable sales went down by 3.5% in 2018 as compared with growth of 6% in 2015).

Benefiting from expansion business strategy of retailers in this sector as a reaction to declining traffic and better performance in international retail customers, the wholesale of these manufacturers in this sector seem to be less impacted than their stores. However, we think the wholesale of these companies this sector will eventually go down as downward trend in US retail market continues.

The typical average gross margin of companies has been seen to go up from about 54% to about 58% in 2018 primarily due to shifting of sales mix to higher margin retail/logistics segment  for some of companies as a result of expansion of new stores. However, as expansion of business the average SG&A as percentage of sales went up as well. Therefore, we see the average operating margin was down to about 6% 2018.

The typical average enterprise price/EBI ratio: 18(interest/EBI ratio of 1%) and stock price/sales ratio is 0.7.

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Company performance:

It seems that the consumer demand for products of this company since 2016 has been declining as indicated by the decrease in comparable sales of its retail stores (booked orders from comparable stores decreased by about 3% annually since 2016). Downward trend in wholesale based on demand of retail customers seems to be slowing down in 2018.

 The fiscal 2018 compared with 2017(ended June 30, 2018)

Organic comparable retail (orders booked) decreased by 3.8% primarily due to lower traffic.

Wholesale increased by 5% attributable to GSA and international retailers.

Fiscal 2017 compared with 2016

Organic comparable retail (orders booked) decreased by 2.5%.

Wholesale decreased by 7.8% due to decrease of demand from retail.

Fiscal 2016 compared with 2015

Organic comparable retail (orders booked) increased by 1.7%.

Wholesale increased by 4.7% due to increase of demand from retail.

Its gross margin has been fluctuated around 55% in this period of time primarily due to mix of sales between retail and wholesale.  However, due the increased SG&A as percentage of sales, its operating margin has gone down to about 6% 2017.

Stock price

This stock currently has a stock price/cash flow ratio of 19 ($23). We think that its stock is being relatively overvalued compared with its peers.