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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: What happened to earnings for Q1 and Q2? Were reported earnings in line with your expectations?

Mr. Baugh: Generally speaking, I have been below my peers in terms of estimates for this year. Looking back at the first half of the year, even my estimates proved to be too optimistic. And yet I was almost always below the consensus view. So the results have been disappointing, which, of course, further fueled the Fed’s easing.

TWST: Even as the economy has weakened, hasn’t the housing sector remained strong, although it may be starting to flounder in some areas now? Isn’t this generally regarded as a positive indicator of demand for furniture?

Mr. Baugh: Yes, it’s certainly a leading indicator, not coincident. I track housing resales as well as housing starts and new home sales, and it has been a very good year. The September numbers have just come out, but through August (this is year to date — in other words, eight months now versus eight months a year ago), new home sales were up 2%, existing home sales were up about 6%, and housing starts, in terms of single-family units (backing out apartment construction), were flat. So the environment for housing has been very good, and the normal pattern is that that housing activity leads furniture, appliances, floor covering, etc. That, however, has not been the case in the last 24 months, so we’ve had a very unusual divergence from that typical historical pattern.

TWST: John, you’ve noted certain similarities between the Gulf War period and the aftermath of the attack on America in September 2001 with regard to the impact on consumer behavior. Will you tell us about these observations?

Mr. Baugh: Yes. If you go back to 1990, the economy was weakening in the spring of that year and then, as Kuwait was invaded in the fall of 1990, the economy fell further still. We ultimately invaded in January 1991, culminating in the CNN effect, as we call it, when consumers were glued to their TV sets for a good two-week period. Business activity in general bottomed in the March quarter of 1991. That was the worst point of the recession. If you look at the events of September 11, again, the economy has been weakening throughout 2001, starting at the early part of the year as we mentioned. So the economy was decelerating, and then we had this major shock. While the event was different, and the response will be different, the impact was the same in the sense that it temporarily put consumers on the sidelines and caused a much more severe downturn in business. So these two periods have exhibited fairly consistent patterns. As we try to look forward, the outlook is cloudier; the Gulf War was resolved relatively quickly, and there wasn’t much doubt as to the outcome. This conflict is more complex and will likely take longer to complete, but I’d like to think we’ll still win. But it’s hard to define what a “win” is, and it obviously won’t be as clean as the Gulf War. So I think there are some more risks as we look out today versus the risk we might have seen in the spring of 1991.

TWST: Which companies have been the beneficiaries of these trends?

Mr. Baugh: Most of the companies that are public are full service suppliers, so they’re making product in all of these areas. Ethan Allen (NYSE:ETH) is a good example. If you’re going to have a retail strategy, which Ethan Allen does, you need to have all these products on the floor.

TWST: We didn’t talk about Ethan Allen, and it too has an important retail strategy, does it not?

Mr. Baugh: Yes, although I’d say it’s more a manufacturer than a retailer. They do own 25% of the Ethan Allen stores out there, but those stores are really there to run the plants.

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.