Couch Potato Alert!

La-Z-Boy…today announced that one of its key suppliers of polyurethane foam has put its customers, including La-Z-Boy, on notice of allocation, due to the lack of availability of TDI (toluene diisocyanate), a key chemical component of polyurethane foam which is used throughout the upholstery and bedding industry.

—Company press release. La-Z-Boy is not what it used to be.

The former champ of America’s den has been floundering for years, the result of a let’s-try-what-everyone-else-is-doing diversification outside the beer-drinking-and-football-game-watching demographic it once owned, and the rise of better run competitors such as Ethan Allen.

The company also said that this situation, coupled with the continued soft retail environment and damage to one of its plants by a tornado spawned from Hurricane Rita, will have a significant adverse impact on its results for the fiscal 2006 second quarter and potentially beyond. The “soft retail environment” is understandable, what with the rise in the Fed Funds rate from 1% a year ago June to 3.75% today. But you wouldn’t think one little chemical compound could have such a huge impact on a company as this.

Kurt Darrow, President and CEO of La-Z-Boy said, “Several TDI suppliers have communicated that because of the effects of Hurricanes Katrina and Rita they have had to declare Force Majeure, a condition which allows companies to depart from the strict terms of a contract because of an event that cannot be reasonably controlled. As a result they will be limiting the amount of TDI they will be supplying which will limit the amount of polyurethane that can be produced. We have been advised by one of our significant polyurethane suppliers to the La-Z-Boy® branded product of their industry-wide notice of an allocation of 50% of normal polyurethane supply. This situation will have a greater impact on us relative to the rest of the furniture industry given the higher percentage of upholstery in our overall product mix.”

Just two short weeks ago the bond market was screaming higher on jubilation (the bond market is a very dark beast, delighting as it does in horrendous economic news such as corporate layoffs and high oil prices and such) that the back-to-back hurricanes would surely cause the Fed to ease up on the interest rate pedal.

But to no avail.

Greenspan went ahead and raised rates for the 11th time in a row, and the two year treasury, which had dropped from a 4.15% yield pre-Katrina to a 3.75% yield post-Katrina, now stands at 4.18%.

Darrow noted, “Polyurethane foam, because of the volume of storage space it requires, is shipped on a just in time inventory basis and therefore our inventories of this raw material are very minimal. Each of our divisions has a different mix of polyurethane suppliers and finished goods inventories and thus will be individually impacted. “We anticipate that the price of polyurethane will increase and that our production schedules at various plants will also be modified according to availability of supply. We will therefore work judiciously to minimize the potential interruption to our customers in all effected divisions by closely communicating with them to assess and balance their product needs to the degree possible.” A friend of mine who runs a small consumer products company tells me how difficult it can be to run a “just-in-time” operation: a single supplier can screw up the entire operation—as it has in the case of La-Z-Boy.

It will be interesting to see who else is being hurt by lingering supply disruptions from two hurricanes which, according to the bond market, were going to diminish economic activity and, therefore, keep inflation at bay.

Just today somebody downgraded Lear, the large auto-seat supplier, on the same polyurethane concerns affecting couch potatoes around America.

Somebody should tell the bond market. This non-inflationary inflation could really start to snowball.

Jeff Matthews I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.