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Three analysts and top management from seven sector firms examine the sector in this special 41-page Home Furnishing issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info450.htm

TWST: And when demand does come back, will it come back to the previous levels?

Ms. Whelan: I would imagine that it should eventually exceed previous levels, given that housing activity has been so strong. We’re still way below the 2000 level, when manufacturers’ shipments were at an annual run rate of $25 billion. There’s no reason why sales can’t get back to that level and then exceed it, but I do think it is going to take longer than most people believe, partly because consumer confidence is low and the unemployment level is still rising. Another problem the industry is facing is pricing pressure, which is growing because of global overcapacity. If you take deflation into consideration, units shipped are not as depressed as the sales numbers suggest. Any revenue number is a product of price by unit; prices are down and units are down, but prices are down much more than the number of units being shipped. I don’t think there is as much pent-up demand as the industry wants to believe. When you look at furniture sales versus total housing activity, which includes new and existing homes, historically the correlation has been 95%. Since April of last year, the correlation has been a negative 40%, which would suggest that there is a lot of pent-up demand. But I’ve been digging into that over the last six months, because the stories I was hearing from the manufacturers were out of sync with what the retailers were telling us. The manufacturers were saying that business was awful — it was down 15%-20%. Retailers were saying that business was awful — it’s flat, or it’s down 5%-10%. The disconnect, it seems, is due to a couple of things. First of all, it’s partly finished goods inventory that was in the system. Second, it’s because of imports that are coming in from Asia, mainly China. Between global overcapacity and the strengthening of the remaining retailers, pricing pressure has heightened.

TWST: What’s your thinking on Leggett & Platt these days?

Ms. Whelan: Leggett & Platt (NYSE:LEG) is a terrific company. LEG is my only strong buy rating right now. They have a terrific management team, above average top- and bottom-line growth, sound balance sheet and a great track record. Management is conservative and understated; they under-promise and over-deliver, which I like.

TWST: Is there any area of concern that’s specific to Leggett & Platt?

Ms. Whelan: No, I think weakness overall in the industry is due to the biggest wild card right now — when business is actually going to turn — but that is not a company-specific issue. Leggett is competitive on pricing and has leading market share positions in many of the industries they cover. One of the risk factors would be the aluminum business, which has not been as profitable as the other businesses and definitely has lower returns on assets. But they have been addressing that issue over the last 12-14 months. They introduced what they called a four-point plan in October of last year to focus on improving earnings. And it has worked; margins are improving even though business is still tough. There are a lot of moving parts at Leggett, but they have the most sophisticated investor relations team of any company I’ve ever followed. That makes it very easy to get your arms around the story.

TWST: What are some of the questions that investors ask you about the furniture sector?

Ms. Whelan: More than anything else, they want to know why is demand so low, and when is it going to come back? I think the reason why it’s so low is because it’s a big-ticket deferrable purchase, so people are waiting. And then they’ll say, well, housing is growing and furniture isn’t, so what’s the disconnect? I think the disconnect pertains to the fact that it is big ticket, that is deferrable, and also that there’s pressure on pricing. So the revenue number I see is not necessarily true in the case of how many units are being shipped.

This special issue includes:

1) Furniture & Floor Covering Stocks - In an in-depth (4,600 words) Analyst Interview, John A. Baugh, Managing Director at First Union Securities, Inc., examines the outlook for the sector and shares specific stock recommendations.

2) Furniture & Home Furnishing Companies - In an in-depth (4,300 words) Analyst Interview, Keith Hughes, a Vice President at SunTrust Robinson Humphrey Capital Markets, examines the outlook for the sector and shares specific stock recommendations.

3) Outlook for US Residential Furniture Stocks - In an in-depth (3,500 words) Analyst Interview, Margaret M. Whelan, Associate Director at UBS Warburg, examines the outlook for the sector and shares specific stock recommendations.

4) CEO interviews (average 2,500 words). Top management of seven sector firms examine the outlook for their firm and the sector.