BUSINESS AFFAIRS

							Raymond James Brief 9.3.08 BIFMA: July Orders +1%; Shipments +1% Analyst(s): Budd Bugatch > After Tuesday's market close, the Business and Institutional Furniture Manufacturers Association (BIFMA) released its market statistics for July 2008. The month's order and shipment statistics are derived from a sampling of 38 companies in the contract office furniture industry whose combined shipments make up about 75% of total industry volume. > July contract office furniture orders increased 1% year-over-year, compared with a 4% decline in June. July shipments also grew 1%, versus a 1% decline in June. The sequential improvement in order growth benefited from a modestly easier prior year comp (+9% versus +12% in June); while the sequential improvement in shipment growth was achieved despite a more difficult comparable hurdle (+12% versus +5% in June). Year-to-date orders and shipments are flat, slowing from mid-single-digit growth in 2007 and mid- to high single-digit growth in 2006. While industry trends have notably softened, demand has yet to collapse despite mounting economic headwinds. > Our cautious outlook for the office furniture industry stems from concern that deteriorating economic conditions will translate into weakening industry demand, thereby pressuring sales and earnings for our companies under coverage. Many of the industry's primary macroeconomic drivers (business confidence, corporate profits, white-collar employment, new office construction, and office vacancy rates) are either negative or deteriorating. The AIA Architecture Billings Index (a leading indicator of non-residential construction) improved slightly to 46.8 in July, versus 46.1 in June. However, it is down sharply versus 58.8 in the prior year and remains below 50, the line of demarcation between expansion and contraction. > Reflecting those factors, BIFMA's most recent industry forecast (updated on August 19th) anticipates negative office furniture consumption growth in both 2008 and 2009. BIFMA now expects 2008 office furniture orders and shipments to decline 2.4% and 3.9%, respectively; better than its previous forecast of down 4.7% and 6.8%. With orders and shipments flat year-to-date, this still implies a significant weakening in 2H08. For 2009, BIFMA projects a 10.8% order decline and a 10.4% drop in shipments; worse than its previous forecast of a 6.3% decline for both orders and shipments. > Additionally, rising costs for steel and petroleum-based inputs/components, as well as higher fuel costs, are pressuring margins. That said, our sense is that the negative margin impact of higher commodity costs is likely to peak in the next quarter or two as costs stabilize/pull back and announced list price increases catch up with input inflation. At a minimum, the sharp pullback in energy prices has clearly driven improved investor sentiment as the group is up more than 20%, on average, since crude oil peaked on July 11th. > Despite our concern that industry demand will remain challenged for the next several months or more, we would reiterate our belief that any downturn will not match the magnitude of the 2001-2003 decline, which took orders and shipments down ~40% from peak levels. > Finally, we would remind investors that each of our companies under coverage is well-managed and high quality, boasting individual competitive strengths and positive cash flow dynamics. The median forward P/E multiple for our companies under coverage is now 11.5x, down from over 18x in February 2007. While this is attractive relative to historic norms, the market appears to be pricing in further downside risk to EPS. > According to BIFMA, July orders were $940 million, up 1% versus $930 million last year, but down from $1.175 billion last month. Estimated trailing 12-month orders were $11.42 billion, slightly higher sequentially and up 1% year-over-year. After maintaining a range of roughly +5% to +6% for most of 2007, trailing-12month order growth has slowed considerably. The July reading marks the weakest percentage growth since September 2004. BIFMA estimates that July shipments grew 1% year-over-year to $930 million. As noted above, this represents a modest sequential improvement compared with June's 1% decline; despite a more challenging prior-year comparison (+12% in July 2007 versus +5% in June 2007). Trailing 12-month shipments increased 2.1% year-over-year to an estimated $11.415 billion. Similar to trailing 12-month order growth, shipment growth continues to decelerate, with July marking the lowest growth rate since September 2004. > Unfilled order backlog increased 2.9% year-over-year to $1.59 billion, down slightly versus $1.61 billion in June. > In regards to our office furniture equities under coverage, we reaffirm our Outperform rating on Herman Miller. Despite our near/intermediate-term industry concerns, our positive investment rating on Herman Miller reflects management's continued strong execution and the shares' attractive absolute and relative valuation. Herman Miller is a well-run, EVA-focused company that combines innovative design, high-quality products,

and lean manufacturing. In recent years, the company has lessened its reliance on the North American office furniture market, diversifying internationally, expanding its healthcare business, and developing emerging technologies like CONVIA. Herman Miller generates substantial positive cash flow, and we are heartened by management's track record of managing the company through difficult times. Finally, MLHR currently trades at 10.8x our NTM EPS estimate of $2.63, a discount to historic norms and modestly below the peer median of 11.5x. Herman Miller reports F1Q09 EPS after the market close on September 17th. Our EPS estimate is $0.55, in-line with consensus. > We also reaffirm our Outperform rating on Knoll. Knoll is a well-managed enterprise that generates significant free cash flow, which management has used to de-leverage the balance sheet and return capital to shareholders through dividends and stock buybacks. We believe that Knoll's focus on higher-end products with high design content lends itself to attractive profit margins and better maintenance of pricing power, important as materials costs, such as steel, continue to rise. Despite consistent execution, Knoll sports the lowest forward valuation of its peers (though that gap has narrowed recently) at 10.2x our NTM EPS estimate of $1.69. > The Market Perform rating on Steelcase stems primarily from its modest valuation premium to peers, now trading at 12.1x our NTM EPS estimate of $0.93. Further, we believe that Steelcase's industry-leading market share and significant international exposure may make the company more vulnerable than its peers to industry weakness both domestically and abroad. We expect Steelcase to report F2Q09 EPS in mid-late September. Our EPS estimate is $0.22, which matches consensus. > We also reaffirm the Market Perform rating on HNI Corp. While we continue to admire HNI management for its financial discipline and cost cutting acumen, we remain reluctant to recommend shares as the company faces headwinds in its three primary end markets, including: 1) slowing contract office furniture demand; 2) weakness in the supplies-driven channel (which caters to small businesses through big-box retailers and catalog dealers); and 3) declining hearth sales, which typically lag new home construction by 9-12 months. That said, we would remind investors that due to its exposure to small business through the supplies-driven channel, HNI will likely be the first among peers to benefit when the economy begins to recover. HNI's valuation of 17.0x our NTM EPS estimate of $1.41 is the highest among the peer group. Raymond James Brief 9.3.08 ETH: Slashing Estimates on Profit Warning Analyst(s): Budd Bugatch > We reaffirm our Outperform rating on ETH despite slashing estimates following the company's earnings pre-release. We are also lowering our 12-month target price from $30 to $28, which represents 15.5x our FY10 EPS estimate, above the 10-year median of 14x, but consistent with our calculated intrinsic value, attached. > While Ethan Allen remains the best of breed among residential furniture equities, it is not immune to gale force industry headwinds. Near-term performance has clearly been disappointing; however, we remain confident that Ethan Allen's differentiated business model and strong balance sheet will enable it to weather the storm and benefit from the inevitable recovery. In the meantime, shares are reasonably valued at 0.8x sales and offering a 3.7% dividend yield. Nonetheless, we suspect shares will be under pressure in today's early trading and the horizon for outperformance has seemingly lengthened. > After Tuesday's market close and ahead of an investor presentation scheduled for this afternoon, Ethan Allen issued a press release providing an update on business trends. Citing "substantially lower sales volume in July and August," CEO Kathwari pegged F1Q09 EPS at $0.20 to $0.26. Our previous F1Q09 EPS estimate was $0.48 (also consensus), which assumed a 10% decline in sales. In its F4Q08 release, management demurred to quantify forward guidance, but commented that it expects to do "relatively well" despite challenging economic conditions. > Accordingly, we are slashing our F1Q09 EPS estimate from $0.48 to $0.25, which assumes a 15% year-overyear sales decline. Our FY09 and FY10 EPS estimates are now $1.32 and $1.80, down from $2.21 and $2.42.