Wednesday, October 05, 2005

Couch Potato Alert!


La-Z-Boy…today announced that one of its key suppliers of polyurethane foam has put its customers, including La-Z-Boy, on notice of allocation, due to the lack of availability of TDI (toluene diisocyanate), a key chemical component of polyurethane foam which is used throughout the upholstery and bedding industry.

—Company press release.

La-Z-Boy is not what it used to be.

The former champ of America’s den has been floundering for years, the result of a let’s-try-what-everyone-else-is-doing diversification outside the beer-drinking-and-football-game-watching demographic it once owned, and the rise of better run competitors such as Ethan Allen.

The company also said that this situation, coupled with the continued soft retail environment and damage to one of its plants by a tornado spawned from Hurricane Rita, will have a significant adverse impact on its results for the fiscal 2006 second quarter and potentially beyond.


The “soft retail environment” is understandable, what with the rise in the Fed Funds rate from 1% a year ago June to 3.75% today. But you wouldn’t think one little chemical compound could have such a huge impact on a company as this.

Kurt Darrow, President and CEO of La-Z-Boy said, "Several TDI suppliers have communicated that because of the effects of Hurricanes Katrina and Rita they have had to declare Force Majeure, a condition which allows companies to depart from the strict terms of a contract because of an event that cannot be reasonably controlled. As a result they will be limiting the amount of TDI they will be supplying which will limit the amount of polyurethane that can be produced.

We have been advised by one of our significant polyurethane suppliers to the La-Z-Boy® branded product of their industry-wide notice of an allocation of 50% of normal polyurethane supply. This situation will have a greater impact on us relative to the rest of the furniture industry given the higher percentage of upholstery in our overall product mix."

Just two short weeks ago the bond market was screaming higher on jubilation (the bond market is a very dark beast, delighting as it does in horrendous economic news such as corporate layoffs and high oil prices and such) that the back-to-back hurricanes would surely cause the Fed to ease up on the interest rate pedal.

But to no avail.

Greenspan went ahead and raised rates for the 11th time in a row, and the two year treasury, which had dropped from a 4.15% yield pre-Katrina to a 3.75% yield post-Katrina, now stands at 4.18%.

Darrow noted, "Polyurethane foam, because of the volume of storage space it requires, is shipped on a just in time inventory basis and therefore our inventories of this raw material are very minimal. Each of our divisions has a different mix of polyurethane suppliers and finished goods inventories and thus will be individually impacted.

"We anticipate that the price of polyurethane will increase and that our production schedules at various plants will also be modified according to availability of supply. We will therefore work judiciously to minimize the potential interruption to our customers in all effected divisions by closely communicating with them to assess and balance their product needs to the degree possible."

A friend of mine who runs a small consumer products company tells me how difficult it can be to run a “just-in-time” operation: a single supplier can screw up the entire operation—as it has in the case of La-Z-Boy.

It will be interesting to see who else is being hurt by lingering supply disruptions from two hurricanes which, according to the bond market, were going to diminish economic activity and, therefore, keep inflation at bay.

Just today somebody downgraded Lear, the large auto-seat supplier, on the same polyurethane concerns affecting couch potatoes around America.

Somebody should tell the bond market. This non-inflationary inflation could really start to snowball.


Jeff Matthews
I Am Not Making This Up


© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

11 comments:

cdub said...

How about...bond yields are so low because of simple supply/demand. Demand from foreign countries, particularly those of the oil producing variety sitting on piles of money, is tremendous. Hence yields are low. It's not about an inflation signal.

Elder Elster said...

Finally someone is talking about the petrochemical industry! The news is so obsessed with whether the soccer moms will be able to drive their SUVs that they forgot the chemical industry consumes 7% of this country’s energy.

But you are right Jeff. It is hard to believe that the decrease in the supply of polyurethane as a result of the hurricanes is impacting La-Z-Boy to this extent. I have been watching the price of specialty chemicals triple over the past year, particularly PIA. This is a chemical used in to produce bottle-grade plastic. So, not only are couch potato’s La-Z-Boys going to be more expensive, but so are their Coke bottles.

All the chemical companies are currently idling, even the companies no where near the Gulf. By decreasing volume due to the price in oil and gas, these companies have an excuse to increase their prices. What they are not telling you is that they have seen record profits across the board for the past three years. It all sounds fishy (or should I say “like fixing”) to me.

whydibuy said...

JUST IN TIME - another buzzword concept dreamt up in the ivory towers of auto manufacturers. It sure didn't come from the real world people on the floor of the plants. They would never be so ignorant of the real world. It sounds great on paper. No inventory to stock. Yeah, in a perfect world it would be fine, but its not a perfect world. Trucks break down, machines break down, tools fail, computers crash, there are fires, floods and winds. The imperfect world has a way of raising its ugly head at just the inopportune time. Yeah, some ceo coined the phrase, all the suppliers gave him approbation over it - and then stocked an inventory at their own plants. A little insurance against an imperfect world. All that " just in time " did was transfer the inventories from the large corps to their suppliers. How would I know this; I used to work for a good sized auto supplier.

tahoe kid said...

"Without chemicals, life itself would be impossible." - From a very old chemical industry ad campaign. No matter how one defines life.

dthorn said...

Not inflation this time. When price increases are caused by supply shortages due to unusual events I don't think that it is inflation. Inflation is a monetary event.

The Bond Market is an inflationary bubble. It used to be that too much money from the fed or govt could be measured in changes in the CPI and the bond market would discount it accordingly. Recently excess money has been forming bubbles and through creative statistics (core #s, hedonics...)has disapeared from the old measures.

We have gone from a Nasdaq bubble to a housing buble to an energy bubble to a bond market bubble. Of course a bond market bubble means that inflation expectations are not discounted in the same way they have been in the past.

Not sure why you are obsessed with informing the bond market that it is mispricing inflation in any case. Can't you just be happy with all the wealth that has been created with low interest rates? As Mr. Raines (the FNM alum) pointed out, 'FNM gave more money to middle class americans through refis than George Bush did through tax cuts. A penny borrowed is a penny earned after all.

Prudent Investor said...

Yield curve inversions -- 'nuff said!

EricBrock said...

Furniture in many ways is a global market. China will pick up the slack at still lower prices. Furniture is the last place we will see inflation to the consumer.

Aaron Koral said...

Jeff: I think investors are seeing a showdown between foreign bond buyers hoping for an end to interest rate hikes with "contained" inflation vs. the bond sellers who fear that inflation will continue in light of interest rate hikes from the Fed.

If I remember my Econ 101 correctly, rising interest rates should generally mean lower bond prices and higher yields. It looks like the Fed may be winning the battle (at least for today) due to Fed Reserve President Hoenig's comments on rising commodity prices as a harbinger of inflationary pressures.

The rising commodity price from your post on La-Z-Boy speaks volumes about the cost pressures consumer discretionary companies (i.e., furniture retailers and manufacturers) are facing now with higher energy costs.

The weird thing about all this, though, is that the current economic environment is shaping up to be non-inflationary: think of the companies announcing layoffs in the coming months (i.e., Motorola, Georgia Pacific, et. al.) and look at the companies announcing earning warnings (i.e., Lexmark, Comcast, etc.) - all the "consumer discretionary" companies (the so-called "couch potato" firms) are getting hit with higher costs which are translating into lower than expected earnings which is driving the stock market down.

The real question, though, is: who wins this war on bonds: the Fed and the foreign buyers it hopes to attract or the bond sellers who are correct in anticipating that inflation (via higher energy and commodity prices) will erode the value of fixed interest payments from long-dated US Treasuries?

Only time will tell... (and I could be wrong, but I think the bond sellers are going to win this battle, and in a big way!)

Its_strange said...

The cost for plastic pots & trays to grow flowers in has gone up the last two years. The energy needed for hothouses is also up. Trucking costs are up. This and the cooling of the housing markets makes for a interesting spring.

econjohn said...

http://www.nytimes.com/2005/10/07/business/07sales.html

Let the Price Wars Begin
By MICHAEL BARBARO
Published: October 7, 2005

It may only be October, but it's already beginning to look a lot like Christmas.

Retailers, worried that rising gas prices and a pair of hurricanes will spoil the crucial holiday shopping season, are already planning broad markdowns to lure cost-conscious consumers into their stores.

Wal-Mart Stores, firing the first shot in the toy price war, is offering the latest Furby doll for $29.88 - $10 below the competition - and is undercutting competitors by $20 on a Fisher-Price ride-on version of the Cadillac Escalade. "Very aggressive on price" is how a Wal-Mart spokeswoman, Karen Burk, described the company's pre-holiday strategy. "We know that our customers are trying to stretch their budget."

Its_strange said...

interesting note from the nursery business. The cost to heat greenhouses will cause the growers to postpone thier planting atleast a month. Bedding flowers will be late and hard to find. This could effect the unemployment numbers