Foam Shortage Hits Furniture Makers

New York, NY, October 6, 2005--The nation's furniture makers, already hurt by sluggish retail sales this year, now must contend with a supply shortage that might slow deliveries and dent profits. The hurricanes that pounded the Gulf Coast triggered production disruptions at many of the region's chemical plants. Several major U.S. furniture companies disclosed late Tuesday that makers of polyurethane foam -- which is used to make padding and cushions -- are having trouble meeting demand. This will cause La-Z-Boy Inc. to significantly miss Wall Street earnings projections during the current quarter. Bed retailer Select Comfort Corp. said the shortage will cause delivery delays for some of its customers, but rival Tempur-Pedic International Inc. said it sees no supply disruptions. "While the cost impact on a company-specific basis is impossible to determine yet, owing to the differing supplier agreements and cost structures, we believe the bigger issue is the threat to availability," said BB&T Capital Markets analyst Joel Harvard. "Retail inventory may be able to absorb current demand for a short time, but we believe customer service/satisfaction issues could arise if availability issues persist more than a quarter." Harvard said he believes poly foam represents about 10% of the selling cost of upholstered furniture. He said this could hurt a number of consumer durable companies, including Bassett Furniture Industries Inc., Ethan Allen Interiors Inc., Flexsteel Industries Inc., Furniture Brands International Inc., Hooker Furniture Corp. and Rowe Cos. So far, the biggest shock to Wall Street was delivered by La-Z-Boy. The Monroe, Michigan-based furniture company warned investors throughout the summer of sluggish sales and higher operating costs. In August, La-Z-Boy said it would miss Wall Street projections because consumers were opting to take advantage of auto incentives, instead of buying furniture. On Tuesday, the company said the foam supply issue compounded their problems. "Given these disruptive events and the continued softness at the retail level, we will significantly miss our estimates for sales and earnings for the second quarter, although at this point, it is not readily quantifiable," said president and chief executive Kurt Darrow in a statement. The company previously projected second-quarter sales decreasing in the low single-digit range from year-ago sales of $521 million. In August, La-Z-Boy forecast earnings of 17 cents to 21 cents per share, compared with profit of 17 cents per share in the 2004 quarter. Analysts surveyed by Thomson Financial project earnings of 18 cents per share on revenue of $512.2 million. La-Z-Boy said it will update guidance the week of Oct. 17. Investors will likely find out more about which companies are having difficulties when an industry trade show that day. La-Z-Boy shares fell 81 cents, or 6.1%, to $12.49 in afternoon trading on the New York Stock Exchange. Earlier, shares dipped as low as $12.16. Select Comfort chairman and CEO Bill McLaughlin said he expects the foam shortage "may result in delivery delays for some of our customers in the early weeks of the fourth quarter." The company does not anticipate significant change in its selling process, and believes delays will be for a limited period of time. Raw material shortages caused by the hurricanes and skyrocketing fuel costs are also impacting other related industries. Carpet manufacturers have taken a double hit. Petroleum is a key ingredient in carpet production, and rising oil prices have drive costs up. In addition, carpet makers said shipments of yarn, petroleum, natural gas and salts from Gulf-area suppliers have been disrupted since the storms. Last week, carpet and floor maker Mohawk Industries Inc., based in Calhoun, Georgia, lowered its third-quarter earnings forecast, saying Hurricane Katrina has increased its raw material costs.