Strategic Exchange: In trying times, it’s important to look long - May 2020
By Kemp Harr
One has to wonder why the stock market is relatively stable when the press is running around screaming the sky is falling. The answer is simple. The equity market is looking six months ahead, and as Don Henley pointed out years ago in his “Dirty Laundry” song, negative news improves ratings.
In light of an incapacitated April, where much of the country was ordered to stay at home, it is encouraging to see the stock market be so optimistic about what the future will bring. I recorded podcasts with two economists last month: Alan Beaulieu with ITR Economics and Kermit Baker with Harvard University. I asked both of them what the recovery from this virus-induced economic shutdown might look like. Both men were very optimistic about the future based on the strength of the economy at the beginning of the year. Kermit pointed to the fact that the new construction market had finally reached the 1.5 million mark-a number we haven’t seen since the last recession.
In case you’re curious how the downturn is affecting the flooring business, here at the end of April this is what we’ve learned. Total sales across all sectors in the first quarter of 2020 were up over last year. The first quarter includes the month of March and despite the fact that we lost almost half the month to the virus-mandated shutdown, growth from the first ten weeks was strong enough to carry us through the quarter and still show growth.
By April, roughly 50% of independent retailers closed their showrooms. Lumber Liquidators and the home centers stayed open, and Floor & Décor closed its showrooms. We estimate that carpet sales in April were down 50% across all retail channels. But the hard surface story shows more of a mixed picture. For independent retail, hard surface sales were down 30%-not bad considering 50% of the stores were closed. But for the home centers, sales of resilient flooring were up a whopping 30% over last year. (We’re singling out resilient versus all hard surface for a reason. The ceramic business at the home centers is in flux, for multiple reasons: heightened competition from Floor & Décor, loss of share to other flooring types, Chinese countervailing duties and limited access to professional installation.)
Let’s look at this 30% growth a little closer. The home centers were all open. That’s a total of over 4,000 stores if we count Home Depot, Lowe’s and Menards. And with the exception of Michigan and Vermont, they were allowed to sell flooring. And in the case of Home Depot, its online, omnichannel investments are making it easy for the consumer to shop at home and just stop by the store to pick it up.
For those of you upset by this growth information within the home centers, there is a silver lining. As I mentioned in Viewpoint, the consumer has been forced to stay home. They know it’s the safest place to be as we continue to social distance, and they’ve canceled their summer vacation. As long as they’ve still got a job, they’re going to want to start fixing up their home and replace their floors. The consumer who buys better-end goods is going to want to buy from an independent retailer.
THE NEW NORMAL
We all know that as destabilizing as the last six weeks have been, we will get through this, and there will be inertia to get us back to the norm. But what won’t snap back? Has this been painful enough for us to change permanently? Will a small percentage of the workforce continue to work from home-reducing the demand for office space and cutting down on commuting traffic? Will people seek more open spaces and reverse the recent trend to live closer to city centers? Since commuter trains, subways and elevators are a great place to get sneezed on, will we see population shifts? Will we see a transition in preference on where products are made based on the thinking that a global market puts us at too much risk for infection? Will we see a drop in handshakes and greeting hugs? It may take a while, but I’m betting it pulls us all a little closer in the end. We often takes things for granted until we have them taken away.
WHAT ABOUT SPORTS?
There’s no telling when the sports season will crank back up again. Many are hopeful that we will start to see football games in the fall. But it’s not guaranteed. The University of Tennessee just sent out a notice to all its season ticket holders that it’s time to send in your check to keep your seats for the fall. It also mentioned that if the season was canceled, they’d be glad to hold your funds until 2021. In the meantime, those of you who love interstate rivalries can go to worldometers.info and compare how your state’s virus incident rate per 100,000 compares to your neighboring states. Tennessee is looking pretty good right now.
If you have any comments about this month’s column, you can email me at email@example.com.
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