Smith Leonard says 2019 showed decline in profits

Melisa D. Galvin

HIGH POINT – An annual furniture industry summary from accounting and consulting firm Smith Leonard revealed some points of significance for business in 2019.

The executive summary, based on a survey of residential furniture manufacturers and distributors, indicated a significant decline in operating profits despite overall higher gross margins.

While surveyed companies’ gross margins increased in 2019 to 22.6% from 22.1% the prior year, selling expenses increased from 8.2% to 9.1%, and administrative and general expenses even more to 9.9% from 8.1%. Smith Leonard in the survey report said a 1.5% decrease in shipments may have contributed to the increase in overall selling, general and administrative expenses.

“Some of the line item changes were likely the effect of sales mix between imports and domestically produced items, as well as other product mix, but the primary reason for the decrease related to an overall increase in selling, administrative and general expenses, which also caused 2018 operating profits to decline slightly,” the report said.

Among other findings of the executive summary:

  • There was a slight decrease in 2019 shipments for upholstery vendors surveyed, down 1.1% after an increase of 2.5% in 2018. Gross profit margins increased to 23.1% from 20.3% in 2018, but operating profit margins declined to 4.5% from 5.5% in 2018. Operating profit margins were 5.8% in 2017.
    “Operating margins were affected primarily by the 2.75% increase in gross margins offset by an increase in selling expenses of 0.93 and an increase in administrative costs of 2.77 as a percent to sales,” according to the report. “We noted that over 80% of the participants reported gross margins of 20% or more, up slightly from last year.”
  • Case goods participants’ shipments decreased 3.4% in 2019 after a near-3% increase in 2018, with shipments slowing significantly in Q4 2018 and on into 2019. Gross profits decreased to 18.3% in 2019 from 24.2% in 2018. Operating income fell to 0.8% in 2019 from 5.9% in 2018.
    “The change in operating income was pretty much across the board as a significant portion of participants reported decreased operating income,” the report read. “There were similar results seen in gross margins with approximately 75% reporting decreased gross margins. The changes in selling and administrative costs were also mixed among the participants.
  • As mentioned, while gross margins improved slightly from 2019, operating profits (gross profit less selling and administrative expenses) declined to 3.7% from 5.8% in 2018. In 2017, operating profit was 6.12 percent.
    “We like to see these margins in the 6 plus percent range in order to provide funds for interest, taxes, principal payments and needed capital expenditures, as well as provide a decent return to owners,” according to Smith Leonard. “So it was a bit disappointing to see the decline this year, but at least the decline was not in margins but in somewhat controllable expenses.”

I’m Powell Slaughter, senior editor at Furniture/Today. I returned to the publication in January 2015 after nine years of writing about furniture retail strategies and best practices at a monthly magazine focusing on home furnishings retail operations. Prior to that, I spent 10 years with F/T covering wood furniture, the last five of those as case goods editor. Upon my return to F/T, I developed coverage of the logistical and service aspects of the furniture industry as well as following the occasional, home office and home entertainment categories. In April 2018 I took over the upholstery category, with responsibility for coverage of the fabric and leather stationary and motion upholstery, recliners and massage chair categories.

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