Canadian furniture stocks strong in '04

Easyhome leads pack with 117.1% price gain

Toronto— Canada's publicly held furniture companies had pretty good years in 2004 and, with some notable exceptions, the stock market signaled its approval with strong price gains over 2003.

There are 10 publicly held Canadian furniture companies, evenly split between manufacturers and retailers. Three are income trusts, paying distributions to unitholders based on the company's actual and projected cash flow. The others are traditional stock issuing companies.

In general, the retailers outperformed the manufacturers, with all five reporting 2004 gains in revenue, net earnings and earnings per share.

Easyhome, this country's largest rent-to-own furniture merchant, was the strongest performer. In 2004, its sales advanced 13.3% to C$88.5 million while net earnings skyrocketed 117.3% to C$8.8 million. Earnings per share surged from 75 Canadian cents to C$1.30 while the stock price at year's end was C$19, more than double its C$8.75 price on Dec. 31, 2003.

An RTO makeover

Under President and CEO David Ingram, the former RTO Enterprises has been repositioned and remerchandised, opening stores at a steady pace. It also has consolidated several banners under the Easyhome brand, enabling it to target advertising more effectively.

Another top performer was bedding specialist Sleep Country Canada, which has been a darling of the financial community since it went public as an income trust in April 2003.

Sales in 2004 were up 18.1% to C$195.4 million, while net earnings shot up 80.3% to C$19 million. Earnings per unit were C$1.36, compared with the prior year's 75 Canadian cents. The unit price at year's end was C$23.89, down from the 52-week high of C$25.10 but well above C$13.50 on Dec. 31, 2003. The issue price in April 2003 was C$10.

Sleep Country's unit price has fallen recently into the C$18 range. As an income trust, its function is to generate steady, reliable income for unitholders, typically averaging a 10% return on investment. Its current monthly distributions will total C$1.25 for 2005 if they continue at the recently announced rate of 10.42 Canadian cents per unit, suggesting its units may be overvalued.

SCI Income Trust, parent of bedding producer Simmons Canada, is on track to pay its unitholders C$1.08 per unit this year, slightly more than last year. The units traded at C$11.99 on Dec. 31, 2004, up from C$10.70 the prior year. The company, with strong ties to nearly every major retailer and buying group in the country, is seen as a consistent performer, rewarding investors year-in and year-out without big swings in the unit price.

Simmons Canada achieved a 9.3% hike in net earnings to C$10.2 million in 2004 despite flat sales of C$128.8 million. Earnings per unit rose to C$1.32 from C$1.21 in 2003.

The Brick Group, also an income fund, is the newest Canadian public furniture company. During the truncated period between July, when its initial public offering closed, and the end of 2004, the retailer's unit value went from the issue price of C$10 to C$13.96. Its current monthly distributions should produce an annual total of about C$1.20 per unit.

The Brick has aggressive growth plans, including a new national sleep shop chain going head-to-head with Sleep Country Canada.

Both of the traditional stock-issuing retailers turned in strong performances last year, although only one was rewarded by the stock market.

Toronto-based Leon's Furniture, currently the fifth-largest furniture and bedding retailer in Canada, saw sales jump 10.7% to C$504.6 million last year, and net earnings advance 19.9% to C$46.1 million, or C$2.41 per share. Its share price jumped from C$27.87 on Dec. 31, 2003, to C$35 one year later.

The closely held, family managed retailer has been a consistent performer, financing growth from its own resources, which have averaged between C$80 million and C$100 million in cash and marketable securities.

Despite flat 2004 sales of C$801.8 million, Montreal-based BMTC saw net earnings climb 20.2% to C$44.5 million, or C$1.21 per share. But its share price fell to C$12.70 from C$13.10 a year earlier.

Both Leon's and BMTC have strong, conservative managements that stress operational excellence and customer service. Perhaps the major difference between the two in 2004 was that workers at BMTC's Montreal distribution center went on strike early in the year, hurting overall performance.

On the manufacuring side, Montreal-based Dorel Inds. turned in another strong performance in 2004, with sales up 34.5% to C$2.2 billion, while net earnings climbed 25.3% to C$130.2 million or C$3.96 per share. The year-end stock price increased C$3 to C$41.50, although it had flirted with the C$46 mark earlier in the year.

Dorel's home furnishings segment, mainly ready-to-assemble furniture, did not make a strong contribution, reporting steep increases in the prices of such raw materials as steel and particleboard. Dorel Asia, its import division, saw solid increases last year.

The remaining three publicly held companies, manufacturers Amisco, Bestar and Shermag, faced similar challenges in 2004, reflected in falling year-end stock prices.

All three traditionally ship 70% or more of their product to U.S. retailers, making them particularly vulnerable to the upward swing in the value of the Canadian dollar compared with the U.S. greenback. They also lost ground to Asian imports.

Amisco, the L'Islet, Quebec-based metal specialist, was ravaged by rising steel prices, which steadily eroded gross margins throughout 2004. Revenue for the year fell 4.7% to C$49.1 million, with net earnings down 28.5% to C$2.4 million, or 62 Canadian cents per share. Its Dec. 31 stock price was C$5.42, down from C$6.30 the year before.

The company is confident it can regain lost ground, thanks to improved efficiencies and new product offerings.

Bestar, the Quebec-based RTA home office specialist, was the only public company to report a net loss in 2004. Sales were stable at C$43.7 million, and the loss of C$442,000, or 4 Canadian cents per share, followed 2003 net earnings of C$254,000, or 3 Canadian cents per share.

Taking the biggest hit

Full-line producer Shermag was the hardest hit by the vagaries of the exchange rate in 2004, although a series of labor disputes didn't help. Sales were up slightly to C$218.1 million for the 12 months ended Dec. 31, 2004. Net income dropped 54.4% to C$8.1 million, or 61 Canadian cents per share. This was reflected in the year-end stock price of C$8.25, off from C$13.96 12 months earlier.

Quebec-based Shermag's unit sales were slightly higher in 2004, as were its sales in U.S. dollars. and operational efficiencies were implemented throughout the year. But the swing in the exchange rate cost it about C$4.5 million in the third quarter alone.

Although furniture is a relatively small part of their overall business, Canada's two largest department stores are major players in the category.

Sears Canada, in 2004 the country's second-largest furniture and bedding merchant, will return to the top of the heap in those categories this year with its acquisition of Cantrex Group. Total sales grew 2.5% to C$6.2 billion in 2004, and net profits rose 13.9% to C$139 million, or C$1.30 per share. Its stock price was $16.99 at year's end, up from C$16 a year earlier.

The merchant markets furniture and bedding through all its channels of distribution, including freestanding home stores, catalog, Internet and a new chain of specialty appliance and mattress stores.

Hudson's Bay Co. saw total sales dip 1.8% to C$7.1 billion in 2004, while net earnings fell 6.4% to C$59.7 million, or 86 Canadian cents per share. Still, its stock price rose to C$13.40 at year's end, compared to C$11.60 a year earlier.

Much of that jump may have been fueled by speculation that HBC may be taken over by one of the largest U.S.-based department store chains.

Company1 Revenue 2004 C$ millions% change from 2003Net income 2004 C$ millions% change from 2003Stock price 12/31/04% change from 2003Amisco (FYE 11/30)C$49.1-4.7%C$2.4-28.5%C$5.42-14.0%Bestar43.7-1.3(0.4)—-0.49-27.9Dorel Inds.2 2,192.934.5130.225.341.507.8Shermag3 218.11.78.1-54.48.25-40.9SCI Income Trust128.8-0.210.29.311.9912.1BMTC801.8-0.144.520.212.70-3.1Brick Group Income Fund4 619.2NA37.3NA13.9639.6Easyhome88.513.38.8117.319.00117.1Leon's Furniture504.610.746.119.935.0025.6SCC Income Fund195.418.119.080.323.8977.0Department stores Hudson's Bay Co. (FYE 1/31)7,069.7-1.859.7-6.413.4015.5Sears Canada6,230.52.5139.013.916.996.2