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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: John, let’s take the sectors that you focus on most closely: floor coverings, residential furniture, and office furniture. What are the issues that you’re factoring into the outlook for these three sectors, and for which sector is the outlook the brightest or at least somewhat brighter?

Mr. Baugh: We can start with the worst first and end on a more optimistic note. The most severely impacted industry right now is the office furniture sector, and in my view it has probably the bleakest near- to intermediate-term outlook. Right now we’re seeing an industry that year over year is running down 30%. If you go back to the Gulf War recession, the worst we saw was roughly a 10% decline. So we are in the depths of a decline that, frankly, this industry hasn’t seen in over 30 years. This industry, of course, is tied to corporate profits more than anything, and we’ve talked about the prospects for profits to be down 30%. It’s funny — with a 30% decline in corporate profits and a 30% decline in business, there might be a correlation there. And by the way, that 30% corporate profit decline, if it occurs, would be the worst since World War II. So we’ve got a nasty downturn on our hands with regard to office furnishings. Clearly, as we look back on the years between 1996 and 2000 — the latter part of the 20th century, if you will — we had some unusually strong business in this industry. It was probably helped by the desire to be Y2K compliant, resulting in significant technology spending. When corporations do that, it typically incorporates some kind of reconfiguration of the office space and office furnishings. And of course, we saw unusually low unemployment that fostered an environment where corporations were competing to attract employees and keep them. And one of the methods they were using to compete for workers was the upgrading of office space. Now we find ourselves in a position where, essentially, the rush to create a Website and the rush to become Y2K compliant is obviously over. Much of the rush to upgrade technology is over, and now unemployment is going up. So the competition for employees is waning, not just among new economy companies but also among old economy companies. So we’re mired in a pretty difficult downturn. The last thing I’d say is that the office furnishings industry normally lags the general economy by about six to nine months. Indeed, if you look back at the Gulf War, the office furnishings industry had its worst quarter in late calendar 1991. The worst economic point of the recession was the month of January 1991. So if we’re indeed in a recession right now and trying to find a bottom here in the fourth quarter/first quarter, it could be well into late next year before we see the office furnishings segment turn around.

TWST: What about Dal-Tile (NYSE:DTL) and Interface (Nasdaq:IFSIA)?

Mr. Baugh: Dal-Tile has a very good story to tell also. Their story is really one of penetrating the residential market. Historically, they’ve been split roughly 50/50 between the commercial and the residential businesses, yet the overall market is roughly 70% residential, 30% commercial. They’re growing their residential business dramatically. In fact, I think it’s up 13% year to date, and they’ve got a lot of momentum there that will hopefully offset the expected weakness in the construction business. The big advantage they have over the importers is that their domestic production allows them a level of service that few can match, and they’ve really utilized their corporate-owned distribution centers as tools for growth. So that’s a story we like.

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.