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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 begin with a review of the year-to-date performance of the furniture and floor covering stocks that you include in your coverage of these industries.

Mr. Baugh: It has been a very unusual year. We began the year with the stocks in an uptrend, thanks to changing psychology in the market with the Fed easing interest rates. We’ve now had nine interest rate cuts. Market psychology changed in late 2000. The economy had been strong and the Fed had been tightening for much of that year, but there were signs that the economy was weakening a little. Easing by the Fed usually creates a very good backdrop for furniture and floor covering stocks. Indeed, the stocks have performed exceedingly well since the fourth quarter of 2000 and really held up right through June/July, when they peaked. This decline was, of course, exacerbated by the selloff post-September 11. Since then, the group has rallied back to pre-September 11 levels. That leaves most of the stocks trading today at prices well above the start of the year, which can’t be said for all major stock indices. So it has still been a net positive year, and interestingly, the stocks have done well while business has obviously fallen off.

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: Apart from the downturn in demand, what are some of the trends that are influencing furniture purchases? Which rooms are going to be receiving or are receiving the most attention from consumers?

Mr. Baugh: We continue to see more attention, in terms of rooms, on family rooms, dens and Florida rooms; formal dining rooms are out! We continue to see upholstery do well because it fits well into these “public” rooms of the house.

TWST: Does that include leather?

Mr. Baugh: Leather is doing very well. Leather is a segment of the upholstery industry, obviously the upper price point segment. It has done exceedingly well and, despite escalating leather costs, has held up very well this year. A lot of entertainment center furniture is selling and we still see demand for home/office furniture. One area that is weak is formal dining rooms, and the bedroom has obviously slowed down. You tend to see this in a slowdown because, again, women buy 80% plus of the furniture in the United States, and they are going to concentrate on the public areas of the home first if they need upgrading or replacing, and would delay the bedrooms if times are tough, which they are right now.

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. Perhaps the most concentrated firm that’s public is Stanley Furniture (Nasdaq:STLY). They have a big chunk of the youth market, which has been very good, and the home office market. But half of their business is bedroom/dining room. One half of their business has been very slow and the other half has been good. So there’s no pure play with the public companies.

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.