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Cinde W. Ingram

Tough year ahead, caution required

The economic outlook for 2007 differs from last year. While watching the housing market's anticipated slowdown and observing changes in retail buying patterns, economists urge retailers to be conservative.

"Definitely the housing market is a big influencer in how people are going to spend in 2007," said Kathy Grannis, National Retail Federation spokeswoman. "Consumers in the first half of 2007 aren't going to have the spending power they had the majority of 2006, and even in 2005, that they got from their homes — whether they were taking out home equity loans or selling their homes. The first half of 2006 was very strong and as expected softened, due in large part to the housing market, the fluctuating interest rates as well as consumer confidence."

Jerry Epperson, furniture analyst with Richmond, Va.-based Mann, Armistead & Epperson, noted the lack of governmental stimulus although economic growth in fourth quarter of 2006 was a shockingly low 1.6%.

"Consumers have a lot of debt," he said. "The adjustable mortgages they took out three or four years ago at great rates are being refinanced at much higher rates today. We're concerned about all of this, and we're also seeing the economists now calling for very slow growth in employment for 2007 and even corporate profits will grow half of what they grew in 2006.

"This isn't the time to take a lot of gambles," Epperson said. "Our big concern is the model most people are using in furniture has changed so much at retail. Many retailers today are making huge investments in direct containers from overseas and these tie up not only a lot of money, but also a lot of time. You can't cancel or reschedule orders as easily. So the capital intensity of our business, the amount of money it takes to be successful, has gone up dramatically."

To stay competitive, most retailers make commitments 90 to 120 days in advance and pay upfront to bring container-loads of furniture from overseas. "It used to be a cash positive business, now it's a cash negative business," Epperson said. "You've got to tie up so much of your money to get the best prices and because so many people are buying that way, you have to, too, to be competitive."

Dale Campbell, Lloyd/Flanders vice president of sales and marketing, also recognized changes in retail buying patterns at casual furniture stores.

"Retailers have become well aware of the costs of bringing too many goods in upfront," Campbell said. "If something doesn't work, they have an immense amount of carryover. And retailers are buying smarter. They're buying what actually fits on the floor instead of trying to be friends and adding three more groups that won't fit on the floor, which causes carryover."

Retailers rely on manufacturers for quicker lead-times. They are not buying as big as they used to because they've learned it's too risky, Campbell said, it can put them out of business.

Epperson listed some of the major residential furniture and casual furniture retailers that closed their doors in 2006 or filed for bankruptcy protection.

"The list goes on and on," Epperson said, "and a lot of this is because of this changing model, so we're telling retailers to make sure you're buying right and turning it fast enough. Pay attention to your overhead. We don't think 2007 is the year to go out and really spend a lot of your money. We think it's going to be another tough year."

Most retailers know online sales grew more than 20% in 2006, making the Internet and catalogs the two fastest growing retail segments. While some fear such growth, others find ways to use it to their stores' advantage.

"It tends to be more highly focused than most people realize and overall the Internet is still less than 3% of everybody's total purchases," Epperson said. "Another thing becoming extremely popular is putting the credit application on the Internet so your consumer knows ahead of time what they can afford to buy when they come in the store."

NRF noted how well retailers have done using product reviews and by combining Web sites with their stores, Grannis said. "They recognize a lot of consumers use their Web site as a research tool. Consumers are, in fact, influenced by the Internet when it comes to purchases. It used to be retailers were afraid something bad would be written about a product and consumers wouldn't come in, but it's actually only added to Web site traffic as well as store traffic."

The vacation home was the fastest growing segment of the housing market for three years in a row, and provides a bright spot for the casual industry, Epperson said.

"People buying vacation homes aren't as reliant on mortgage rates because there really isn't that much waterfront property left and it really is an investment," he said. "So we can actually get two bites of the apple."

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