Sector financial performance:

This company, who is primarily a designer, marketer, and importer of furniture, has been grouped into residential upscale furniture – design &distributor sector in furnishing industry.

While the increased product price of third party supplier may play a role, the diminished upscale furniture sales of US companies in this sector is directly related to competition of international manufacturers, which possess price advantage and flexible distribution channels. Therefore, while performed well in high end furniture segment, their sales volume went down (about 5% and 8% in 2015 and 2016). As a response to the decreased sales, companies tried to push up sales volume (up by 1% in 2017) by discounting and expansion of distribution channels or stayed away from value segment and turned to focus on high end segment.

We have seen many positive signals in high end market in 2018 as indicated by increasing price and sales volumes. However, companies seem to be still struggling in value market.

Weak demand, working with increasing pressure of cost from third party manufacturers, squeezed the gross margin of companies, which has been seen typically down to about 20% from about 22% of 2014 but bounced back to about 21% in 2018. The typical average SG&A as percentage of sales is improved to about 12% and the average operating margin thus went up to about 9% in 2018.

The typical enterprise price/EBI(a) ratio: 13 (interest/EBI ratio of 3%).

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Company performance:

It seems that the trend of decrease in sales volume in the past several years has made a turnover

after entering 2017 thanks to increase in leather furniture sales and lower selling price. When reduced discounting in 2018, sales volume went down. However, it seems that company’s sale may be benefiting from its expansion in online distribution channels and a recovery of soft industry and market.

 The first three months of fiscal 2019 compared with the same period of 2018

Organic sales (excluding acquisition ) increased by about 3% attributable to increase of about 6% in price offset by decrease of about 4% in sales volume.

The fiscal 2018 compared with 2017(ended 2018/01/29)

Organic sales (excluding acquisition ) increased by about 5% attributable to increase of about 10% in unit volume offset by decrease of about 5% in price.

Fiscal 2017 compared with 2016

Organic sales (excluding acquisition) decreased by about 6% attributable to decrease of about 8% in unit volume offset by increase of 2% in price.

Fiscal 2016 compared with 2015

Sales increased by about 1% attributable to increase of 2% in price offset by decrease of 1.5% in sales volume.

Its gross margin has gone down from about 26% in 2014 to about 22% of 2018 probably due to lower margin of newly acquired business and discounting offset by lower freight costs. while its SG&A as percentage of sales went down to 14%, its operating margin has gone down to about 7% in 2018.

Stock price

This stock currently has enterprise price/EBI ratio of 19 ($48). We think that its stock is being relatively overvalued while, as a much bigger sourcing company, it possesses bigger purchasing power in negotiating price with suppliers than its smaller peers.