As previously documented on BRIIDGE, the chaotic macroeconomic environment, marked by initial convergence and subsequent divergence of fiscal and monetary policies, has amplified dislocations in market performance across industries and investment themes. Fluctuations in money supply caused rapid and significant shifts in investors' risk appetite.

While the impact of the tightening cycle was dramatic but short-lived for certain industries—such as software infrastructure, which recovered following an initial drawdown—others, like Furnishings, Fixtures & Appliances, have experienced a more prolonged downturn, failing to recover over the past three years, underperforming the market by 55% (equal weight).

Fig 1: Performance 1YR Horizon

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Fig 2: Sales Growth [1YR Rolling]

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Unlike industries able to pass on inflation costs to consumers or third parties, the primary demand drivers in this industry—consumers themselves—were left burdened as the stimulus-driven excess in money supply rapidly receded, and savings were depleted. Even as inflation declined, the mismatch between elevated long-term prices and stagnant wages became critical.

This issue was further exacerbated in a tightening labor market, where companies accelerated layoffs in an effort to maintain margins and satisfy investors. Over the past three years, median sales growth in the broader consumer cyclical sector (driven by disposable income) trended downward but remained positive.

However, for the Furnishings, Fixtures & Appliances industry, sales growth turned negative during the four quarters ending in Q1 2023. Despite this, outliers like MasterBrand and Mohawk Industries have defied industry trends over the past 12 months, posting a 20% and 50% positive spread, respectively, against the benchmark, while the industry as a whole recorded a double-digit lag on an equal weight basis.

Although these companies have shown stock price momentum, their fundamentals do not yet justify the significant spread over the industry, as their growth and margin profiles remain in line with the broader sector.

Fig 3: Operating Margin [1YR Rolling]

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Fig 4: Free-Cash-Flow To Sales [1YR Rolling]

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In MasterBrand Inc.'s case, its outperformance was driven primarily by a low valuation and improved guidance. Mohawk's positive performance, on the other hand, was attributed to better-than-expected quarterly results, a strong commercial unit, and restructuring efforts.

With monetary policy turning more accommodative, there may be an opportunity for arbitrage, assuming macroeconomic conditions do not deteriorate further. However, should the macro environment worsen, it would likely lead to further compression in relative valuations.

Fig 5: Net Income Margin [1YR Rolling]

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Fig 6: Performance [1YR]

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Fig 7: Dividend Yield

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Fig 8: Net Debt To Ebitda [1YR Rolling]

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