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  Without government support, furniture industry may not have a leg to stand on

BENJ GALLANDER and BEN STADELMANN

Friday, November 23, 2007

There has been a lot written lately about the "huge" Canadian budget surplus of $14 billion. With a budget of $222 billion, this does not seem to be such a big number. Given that the federal government has a debt load of about $414 billion, the surplus represents only about 3 percent of the mortgage outstanding. Even if every dollar were used to pay down the debt (and it won't be by a long shot) the debt would take 30 years to pay off.

For many, the huge deficits spawned by the Trudeau and Mulroney governments rest uneasily close. In their "heyday," the red ink ran to $40 billion and change in some years. Quite simply, it is far easier to crawl into a debt sinkhole, than out of one.

In the bad old deficit days, the Canadian dollar tanked and there was even talk of adopting the U.S. dollar. Fortunately, Jean Chrétien and Paul Martin restored fiscal sanity and the Canadian dollar responded. Yes, the resource story has helped the process along with Bush economics, but central to currency movements are deficits and surpluses.

We're reminded of a time in the mid-'90s when Benj was on CBC's This Morning; the dollar was hitting its nadir and, while the host pushed Benj to hazard a guess on how low it would go, he just kept replying that the Canadian dollar was extremely undervalued.

In those days, Canadian exporters could enjoy the competitive advantage of a cheap currency. No longer.

One industry that has been decimated by the rise in the loonie is furniture. Three of the current survivors include Amisco, Bestar and Shermag. Besides the dollar, the proliferation of Asian manufacturers, and the train wreck in the American real estate sector (watch for the Canadian version soon!) which is reducing furniture demand, it's questionable whether these three can survive, let alone thrive.

In the spring of 2004, Amisco traded above $10. Currently it sits at around $1.45. Somehow, the dexterous management has kept the corporation operating at around the break-even level. The balance sheet has remained a thing of beauty, as this enterprise knows how to live within its means. Those means have deteriorated as sales have plummeted from the $50 million range in 2004 to what will likely be about $30 million this year.

Four years ago, Shermag's stock price touched $16. Today a share can be had for less than a loonie. Revenues are plummeting: in the second quarter, sales were around $27 million, down from $45 million last year. The loss tripled to more than $3.6 million.

The stock did jump about 40 percent recently when it was announced that George Armoyan, president and chief executive of Clarke Industries, which holds almost 20 percent of Shermag, was joining the board. However, that gain has since been given back, and then some. Investors may be sensing that lower sales and a higher Canadian dollar could prove too difficult a mix for even this Canadian turnaround specialist to overcome. The bind was too much for Jeffrey Casselman, the former president and CEO, who resigned this week.

Against the industry trend, Bestar sales have been bending upward for the previous year, and should top $40 million this year. That is still a marked decline from the north of $75 million in 2000. Management here has also displayed exceedingly acute survival instincts; operating around break-even after such a precipitous sales decline is no small feat.

While a sector as far out of favour as furniture would normally represent a contrarian's delight, we at Contra the Heard have been fortunate to remain outsiders thus far and have no plans of venturing in, as the risk remains too great.

While we're not big fans of government intervention, if ever a sector deserved tariffs to stay alive, this is it. The artificially cheap Chinese yuan, along with lower production costs due to looser environmental regulations, make for an uneven playing field on which it's nearly impossible for Canadian companies to compete.

All of these companies have been around for over 30 years, with Amisco and Bestar around the 50-year mark. What a shame it would be if they were forced to shut their doors because of government inaction on sustaining long-term Canadian jobs, controlled by Canadian enterprises.

Rather than simply focusing on tax reductions and cheap goods for consumers, the government must protect our manufacturing base, as this will provide tax dollars to help further reduce the debt. It would jeopardize Canadians' future quality of life to end up in deficit territory once more.


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