business

The furniture industry has become something of a scratch-and-dent event in recent years.

Long before the credit crunch went global, furniture stores were getting banged around as the once-hot housing market began to chill, and consumers began using their disposable dollars to buy wide-screen televisions instead of new dining room sets.

Mom-and-pops went belly up, as did some of the industry's top players, including Rhodes Furniture, Levitz and Wickes Furniture.

Then the credit squeeze hit. Like auto dealers, which have been hit hard in recent weeks, furniture stores rely on credit for both sides of the business: to purchase their vast amounts of expensive inventory and -- often -- to extend financing to their customers to help them afford their goods.

"It's horrendous out there right now," said Mike Pierce, a spokesman for the National Home Furnishings Association in High Point, N.C. "We're seeing the collapse in the sale of homes and the collapse in sales of furniture. And now fewer people are qualifying to receive credit because they don't meet qualifications."

But in the Twin Cities market, two home-grown players seem to be avoiding the credit woes squeezing their competitors nationwide.

Room & Board, which sells modern upscale furniture, saw the slowdown coming. It immediately worked out a timeline with its manufacturers, many of which are small and family-owned, to gradually decrease production.

"I'm not going to shut off my partners and drop inventory immediately," said Gene Wilson, director of vendor management of Golden Valley-based Room & Board, which has eight stores in five states. "We do it in a way that helps us both be healthy. Our business is ongoing, and we need to have partners who will come out the other side of this with us."

Meanwhile, HOM Furniture, a 13-store chain based in Coon Rapids, is capping a year of growth in which it opened three new stores and also snapped up Gabbert's high-end Edina store. But it expanded without taking on debt.

"We're capitalizing from within," said Rod Johansen, HOM president and CEO. "We don't have a must-do attitude with expansion. We look for the right real estate opportunity as our key motivator to expand."

But as lenders tighten the vise on manufacturers, suppliers, retailers and, increasingly, on shoppers, the forecast calls for bleaker days ahead in the furniture business.

Plymouth-based mattress maker Select Comfort has taken a hit locally, with a share price hovering in the $1 range.

Former Gabberts owner Jim Gabbert, whose father founded the namesake business in 1946, said he sold the company to HOM in August because changes in the industry -- including a shift to cheaper offshore manufacturing -- made it harder for single-store operations like his to survive.

With stores throughout five Midwestern cities, and suppliers based in the United States and overseas, HOM jumped at the chance to add Gabberts to its mix of middle and upper-mid range offerings.

Business at HOM has been down, Johansen said, though secondary markets such as Duluth and Fargo are faring better than those in larger cities. Combined sales this year are expected to be about $200 million. In 2007, sales at its 11 stores were $184 million, according to trade publication Furniture Today.

And so far, HOM's third- party consumer credit vendor hasn't clamped down on its shoppers.

'Inventory on the water'

Around the country, the furniture industry isn't faring well. Nationwide, orders for new furniture plummeted 17 percent in July compared to a year ago, according to the most recent data from industry tracker Smith Leonard.

Manufacturer and $3 billion retail giant Ashley Furniture of Arcadia, Wis., last month laid off 200 workers at its plants in Mississippi, about 5 percent of the workforce there.

In May, GE Capital Solutions dealt a blow to manufacturers when it announced it was cutting off all its inventory financing.

Consumers feel it, too. A recent Furniture Today story quoted a retailer in California, a state hard hit by foreclosures, who said credit approval rates are down 10 to 15 percent for his customers.

"In days gone by, if you were a furniture store and things slowed down, you just called the manufacturer one state over and said, 'Hold the order for a while,'" said Jerry Epperson, an investment banker with Mann Armistead & Epperson of Richmond, Va. "Now, with 60 percent of wood products and 30 percent of upholstery coming from China, you've got six weeks of inventory on the water at one time. It's harder to get [orders] started and harder to get them stopped."

At least 20 percent of furniture sales are dependent on housing turnover, Epperson said. In good times, people hit the stores within six months to a year of moving to a new home. Home sales are down 15 percent so far this year, according to the National Association of Realtors.

Managing the slide

Room & Board saw sales fall this spring. Small suppliers such as metal fabrication company Bell Manufacturing were potentially the most vulnerable.

Bell Manufacturing, a 43-year old family-owned business based in Golden Valley, makes bed frames, mirrors, bookshelves and tables exclusively for Room & Board. About 90 percent of its revenue is tied to the retailer.

When inventory started backing up in March and April, Bell said Room & Board revised its forecasts and expanded Bell's inventory float from four to six weeks.

The two companies worked out a "balancing point," Bell said, "where we both could manage inventory and manage the downside." For Bell, that meant trying to avoid widespread layoffs at her 50-person company and not putting too much cash into raw materials.

Additionally, when prices on steel spiked 40 percent this spring, Room & Board adjusted Bell's prices, even though the retailer guarantees prices to its customers for a full year.

"They're not your typical retailer where they're dictating how things have to be," Bell said. "It's definitely a partnership."

Founded in 1980 after John Gabbert split from his family's traditional furniture operation, privately held Room & Board relies on catalogs to convey its business principles instead of a mass-market advertising budget. Aside from its outlet store in Golden Valley, its products don't go on sale.

In 2006, when the industry as a whole was seeing revenue increases of less than 5 percent, Room and Board's sales rose 17 percent, the second-highest in the industry, according to Furniture Today. Last year, sales were $230 million, Furniture Today reports. Sales are expected to be flat this year, Wilson said.

But after that, Room & Board will continue steady growth of 20 percent a year, Wilson said. A new store will open in Atlanta in March, and one is planned for Culver City, Calif., in 2010.

HOM's Johansen says the future isn't completely bleak. The credit crunch has forced overseas prices of source materials to stabilize from creeping inflation. The dollar is getting stronger, as well.

"If they can get the credit markets back and stabilized so things can get going again," he said, "people can get confident that the sky isn't falling."

Jackie Crosby • 612-673-7335