The furniture industry's recovery relies on customers getting used to paying more

By Bill Peters

'We need to see housing turnover improve for things to really take off,' analyst says

During Wayfair Inc.'s earnings call this month, Kate Gulliver, the online furniture retailer's chief financial officer, said that after a two-year slump, demand for sofas, beds, chairs and home decor would eventually get back to normal.

"People get married, they have kids, kids move out," she said. "The need for home furnishing never goes away. And over time, the category will rebound and return to its typical pattern of growth."

But analysts say that despite recent post-earnings stock rallies from some big furniture sellers - notably from Wayfair (W) itself and its upscale industry peer RH (RH) - that return could take time, as higher mortgage rates, along with higher prices for homes and lots of other things, keep people from moving into new homes or re-imagining existing ones.

Furniture sales, which hinge largely on the housing industry, are still down this year. Some analysts say that even if the industry grows during the second half of this year, it'll be off of weaker trends from last year. A recovery, they say, could start small, led by higher-income customers.

Or, they say, homebuyers could end up relocating and re-decorating regardless of whether interest rates come down, as they get used to steeper borrowing costs in the same way they've gotten used to steeper prices at grocery stores and restaurants.

"If we get rid of the friction from higher interest rates, then you get people really moving and putting new furniture in their houses," Morningstar analyst Jaime Katz said in an interview. "But if it's like what we have now, then maybe you have something more muted, where people are just refreshing their linens, their bedspreads, and their pillows on their sofas."

April's jobs report could help pave the way for lower interest rates up ahead. But economic data released this week didn't exactly suggest a bold recovery.

Unadjusted sales at U.S. furniture and home furnishings stores have fallen 9% year-over-year during the first four months of this year, according to government data released on Wednesday. Inflation didn't necessarily get any worse last month, figures on Wednesday showed. But one economist warned of potentially steeper housing prices up ahead.

Federal Reserve Chair Jerome Powell, speaking at a meeting of the Foreign Bankers' Association in Amsterdam on Tuesday, said that the price increases that have defined the economy since 2022 were still happening at a more aggressive rate than anticipated. And he said that "we'll need to be patient" as the central bank's prescription of higher interest rates - intended to bring prices lower by discouraging borrowing and spending - reverberates through the economy.

Meanwhile, home-improvement retailer Home Depot Inc. (HD) on Tuesday reported quarterly sales that came up short of Wall Street's expectations, as customers continued to shy away from bigger home-renovation projects. Executives also blamed a slow start to the spring selling season. They stuck with their outlook for sales growth of around 1% this year.

"We believe that the high interest rate environment, and uncertainty around rate cuts, are negatively impacting spending on bigger ticket discretionary home improvement projects," Jonathan Reid, director at Fitch Ratings, said in emailed commentary.

Wedbush analyst Seth Basham said a rebound in existing-home sales was key to driving better results.

"We need to see housing turnover improve for things to really take off," he said.

He said after people buy a new home, they tend to spend the next several months putting furniture in it. That means it can take around that long for a rebound in housing to translate into a rebound in furniture demand.

When Wayfair reported results this month, executives said the first quarter ended on an "upswing." Sales fell 1.6% during the period overall. But they were still better than expected.

In March, shares of RH rallied after the chain forecast improving demand for the year. But some analysts said that forecast masked a weaker fourth quarter, and the company itself said it expected weaker trends until interest rates fell and thawed out the housing market.

Similar to clothing, some of the industry's biggest players are loading up on new products to capitalize on any comeback. Those moves could help them grab a bigger portion of the market from smaller stores, which have struggled more over the past two years.

Suppliers, Wayfair said, were replenishing their catalogs with large groups of new furnishing selections for the first time since before the pandemic, as they prepare for the industry's next growth phase. Wayfair did not respond to a request for more detail.

RH, meanwhile, said in March that it was "investing in the most compelling product transformation and platform expansion in our history." That transformation, executives said, included its new RH Modern catalog, which features 30 new collections, some of which are concepts from the estate of Harvey Probber, a furniture designer who helped introduce the nation to sleek sectionals in the 1940s.

Basham said trends had crept slightly away from traditional furniture - that is, the deeper hues and embellishments with echoes of old royalty - and mid-century modern, or the more angular designs of the "Mad Men" era. At the furniture retailer Arhaus, Inc., rounded lines and bursts of color to stand out from the browns and grays have become more popular, he said.

Still, Arhaus (ARHS), during its earnings call this month, suggested that more broadly, tastes were all over the place.

"It's a big country out there," Chief Executive John Reed said. "There's different tastes in Alabama and Cleveland and LA. And although core pieces are always bestsellers everywhere, there's different tastes."

"Some markets are more modern," he said. "Everything has gone fairly modern contemporary over the years. So we're seeing a big swing of the people who are coming back to a little more transitional, even some traditional pieces."

He also said the company, in the months ahead, would bring in more colorful pillows and other decor, to help people accent their homes without committing to larger pieces of furniture.

Generational differences will also play a role in the furniture industry's rebound. People are getting married and having children later in life. The financial analyst Meredith Whitney, in a recent report, said a "crisis of the young American male," one in five of whom live with their parents, would cause a steep correction in housing prices.

Katz said the furniture industry's recovery would also depend on shoppers' expectations for interest rates, and whether they become accustomed to higher for longer borrowing costs to buy a home. The average 30-year fixed-rate mortgage sank to a record low of 2.65% at the beginning of 2021, thanks to the pandemic, before spiking to the 6% to 7% range that has persisted through today.

"If people start to get desensitized to that, that this is the new normal, which is probably is, will people start to move just despite everything?" she said. "Because we're not going to have 2% mortgages again. That's just not the reality of the situation."

-Bill Peters

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05-17-24 1322ET

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