The steady rise in homeownership is also a positive indicator for the sector, since homeowners tend to spend more than renters on durable goods -- especially on furniture.
Amy Glynn, analyst with Standard & Poor's Equity Research Services

High costs, consolidation, and increasing foreign competition continue to threaten the stability of the household durables industry, but demand for household appliances and home furnishings is rising steadily in step with a strong housing market and the trend is likely to continue, said Standard & Poor's in its semi-annual survey on the household durables industry, published today.

Standard & Poor's Equity Research has a neutral outlook on the household appliance and home furnishing sub-industries, as the challenging cost environment will likely limit valuation gains in the next couple of quarters. In addition to improving profitability, household durables companies are faced with finding ways beyond a strong housing market to drive demand. In 2005, S&P expects appliance manufacturers' profits to decline further from the low in 2004. Standard & Poor's predicts that profit margins will improve in 2006, however, as the industry starts to reap benefits from volume growth, better capacity utilization, and leaner cost structures.

"In an otherwise difficult operating environment, the continued buoyancy of the housing market bodes well for appliance and furniture manufacturers," said Amy Glynn, analyst with Standard & Poor's Equity Research Services. "With Americans buying bigger homes than ever, including increasing numbers of second residences and investment properties, demand for durable goods is being boosted as homeowners are obliged to fill them with appliances and furniture. The steady rise in homeownership is also a positive indicator for the sector, since homeowners tend to spend more than renters on durable goods -- especially on furniture."

Rising energy costs have sharpened Americans' bargain-hunting instincts, causing many consumers to tighten their purse strings, particularly when it comes to furniture shopping, added Ms. Glynn. Following 6.3 percent growth in the segment in 2004, retail sales at furniture and home furnishings stores rose only 3.9 percent to $50.5 billion (not seasonally adjusted) in the first six months of 2005. In contrast, retail sales in this group overall rose 7.5 percent during the first six months of 2004. The slowdown is particularly striking when compared to retail sales growth as a whole, which progressed at a steady 7.2 percent year-over-year rate (not seasonally adjusted) during the first six months of 2005. Since economic data provides evidence that unit demand for furniture continues to rise, Standard & Poor's believes the primary obstacles for the sub-industry remain price erosion and increased competition from low-cost manufacturing countries such as China. S&P concludes that vast quantities of imported furniture are being pushed through retail channels, but declining prices are masking it. In short, consumers are still buying, but they expect to pay less than in the past.

In the household appliance sub-industry, positive factors such as low interest rates and continued strength in the housing market have continued to fuel consumer demand. However, appliance manufacturers have been hit with significant raw material cost pressures -- steel in particular -- as well as high energy costs, which have caused margins to fall below historical levels. To offset these pressures, manufacturers have raised product prices and implemented major cost saving programs. Standard & Poor's expects 2006 margins to benefit from moderating raw material pricing and cost reductions. Regarding Whirlpool's highly publicized acquisition of rival Maytag, while S&P feels there could be some near-term integration issues, we think Whirlpool will benefit over the longer term due to greater brand equity and a stronger competitive position.