Sector financial performance:

This company, who is primarily a designer and distributor of upscale wood 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 decrease in sales volume of products of this company in the past several years has been attributed to manufacturer/shipping delays. However, it is possible that the decrease has been due to less orders/demand. Aggressive discount in price may also prove the weak demand for this company’s products.

 The first nine months of fiscal 2017 compared with the same period of 2016

Sales decreased by about 4.4% attributable to decreases in unit volume offset by higher price (due to aggressive discount prior year)

Fiscal 2016 compared with 2015

Sales decreased by about 22.3% attributable to decreases in unit volume (shipping delays) and to lower price (due to aggressive discount)

Fiscal 2015 compared with 2014

Sales decreased by about 5.4% attributable to decreases in unit volume (shipping delays) offset by higher price.

Its gross margin has gone up by about 150 basis points to 21% in 2017 primarily due to decreased operating costs and lower discount. However, due the increase of 150 basis points in SG&A as percentage of sales, its operating margin has no changes and has been still at about -5% in 2017.

Stock price

This stock currently has a stock price/sales ratio of 0.23 ($0.6). We think that its stock is being relatively overvalued considering that the stock price/sales ratio of 0.23 implies an about 1% operating margin to be expected and it seems very difficult to reach for this company in the current situation.