MONOMOY HOME FURNITURE OUTLOOK - INTERVIEW WITH TERRY MCNEW, CEO OF KLAUSSNER HOME FURNISHINGS - JULY 2021

Monomoy Home
Furniture Outlook
Interview with Terry McNew,
CEO of Klaussner Home Furnishings

July 2021

“    Today, our backlog is
     still almost three times
     the normal level…

     HOME FURNITURE
                                                                       Interview
                                                                       with Terry McNew
                                                                       CEO of Klaussner Home Furnishings
       OUTLOOK

Headquartered in Asheboro, North Carolina, Klaussner is a leading
manufacturer, importer and supplier of mid-priced furniture to traditional
retailers and the e-commerce channel. Klaussner builds made-to-order
custom upholstery products (sofas, sectionals, love seats, loungers and
chairs) from a vertically integrated manufacturing campus in North
Carolina and supplies upholstery, case goods and bedding products
to national, regional and online retailers.

Overall, how has Klaussner rebounded from the impact of COVID-19
and how has the business performed in the first half of 2021?
Our business rebounded significantly in the second half of 2020 and continues
to grow through 2021. Incoming order volume from both traditional retailers and
the e-commerce channel increased sharply as the nation emerged from the initial
wave of the pandemic and has continued to grow through this year. In total, we
expect net sales to be up 30% in 2021 on a year-over-year basis.
Our biggest challenges coming out of the pandemic have been the ability to
keep up with demand and the need to reduce the lead times for custom furniture
from months to weeks. Through daily and weekly operational improvement, our
manufacturing operations have become more productive and efficient than at
any time in the company’s history.

 1   MONOMOY HOME FURNITURE OUTLOOK INTERVIEW WITH TERRY MCNEW, CEO, KLAUSSNER HOME FURNISHINGS | JULY 2021

How does Klaussner’s demand profile look for the remainder of
2021 and heading into 2022?
Klaussner has essentially sold out its manufacturing capacity in domestic
upholstery through the end of 2021. We are working round the clock to create
additional capacity to satisfy demand and grow the business. Demand is up
significantly in every category we serve and continues to grow as we look
ahead. If anything, the first half of 2022 looks stronger than 2021, and our
larger customers like Wayfair, Macy’s and Jordan’s Furniture believe that
demand will remain high through 2022 and into 2023. We will focus on
expanding capacity to meet demand despite a broken supply chain.

How have you been able to keep up with demand given macro
supply chain disruptions?
To service our customers, Klaussner needs lumber to build frames, chemicals
to produce foam and case goods and bedding manufactured in Vietnam. Over
the past 12 months, and especially over the past six months, we have seen
unprecedented shortages in all of these materials, extraordinary delays in
shipments from Asia and periodic labor shortages in North Carolina. This is
entirely new territory for the industry and Klaussner.
In response, we have challenged ourselves to get better every day at everything
we do. That means a commitment to increased customer communication
and transparency, driving increased productivity in every Klaussner business
practice, and taking advantage of our in-house framing and foam production
capabilities to maintain production.
Our focus on operational excellence is helping both Klaussner and its
customers. Near the end of 2020, our backlog for manufactured upholstery
products was nearly six times its normal average and our lead times, while
industry-average, were two to three times normal for Klaussner. Today, our
backlog is still almost three times the normal level, but our lead times for
our top customers are approaching pre-pandemic levels. That makes a huge
difference in our industry.
We have more work ahead on supply chain issues. Lumber shortages have
abated over the past six weeks, but chemicals remain on allocation, the local
labor market remains tight and we expect Asian container shortages and freight
delays to get worse over the next six to nine months. At this point, we don’t
expect Klaussner’s backlog to return to a normal level until mid-2022.

 2   MONOMOY HOME FURNITURE OUTLOOK INTERVIEW WITH TERRY MCNEW, CEO, KLAUSSNER HOME FURNISHINGS | JULY 2021

Coming out of COVID-19, are there any lasting trends that will have
an impact on the way people buy furniture?
No surprise here. The pandemic accelerated an existing trend in consumer
enthusiasm for making big-ticket purchases online. In the furniture business, we
saw hints of this trend before COVID-19 in the growing “bed-in-a-box” market.
Coming out of the pandemic, it is clear that any piece of furniture that can be
shipped in boxes can be – and will be – bought online.
In our view, that means that traditional furniture retailers need to develop
e-commerce capabilities to remain competitive and that furniture manufacturers
like Klaussner must be able to service retailers both at the store level and
online. In addition, the growth of e-commerce will require manufacturers like
Klaussner to become more nimble in their product offering and hyper-focused
on changing consumer preferences.

Can you discuss the channels you supply through and how they have
shifted, if at all, coming out of COVID-19?
We have observed two related changes in our customer base. First, as
discussed above, Klaussner’s sales to e-commerce retailers (e.g., Wayfair
or Macys.com) and direct-to-consumer brands (e.g., Nectar or Burrow) has
increased as a percentage of our overall revenue as furniture sales have moved
online. Second, the pandemic accelerated the consolidation of brick and mortar
furniture retailers across the country in favor of larger regional and national
businesses. As a result, Klaussner’s sales to larger retailers should increase
going forward, and the number of customers we supply will decrease even as
our top line continues to grow each year.
Both of these trends are good for Klaussner. Unlike most of Klaussner’s
competitors, we have 15 years of experience in supplying the e-commerce
market and we are one of the largest, if not the largest, domestic suppliers of
custom furniture to Wayfair. And our focus on larger brick and mortar retailers
should enable Klaussner to continue growing with the retailers taking market
share in the industry.

 3   MONOMOY HOME FURNITURE OUTLOOK INTERVIEW WITH TERRY MCNEW, CEO, KLAUSSNER HOME FURNISHINGS | JULY 2021

How is Klaussner adapting to the growing shift in e-commerce
shopping?
Is Klaussner ready for the shift to e-commerce? We were born ready. We have
the strongest e-commerce partners in the industry; we know how to service
e-tailers and help them grow; and we are literally years ahead of most custom
furniture makers in the online space. In addition, over the past five years,
Klaussner has become the manufacturer of choice for several of the most
successful “sofa-in-a-box” e-tailers in the market. We are in great shape with
our existing e-commerce customers and well-positioned to supply the rest of
our customers as they develop an online presence.

When we spoke to you last year, becoming a leaner and more
agile business was high on your priority list, especially as it relates
to manufacturing and product development. How has Klaussner
transformed in the past 16 months?
We fundamentally transformed the company’s manufacturing system over the
past 16 months. Synchronous flow manufacturing has been implemented in our
factories; procurement and supply chain management has been coordinated
with sales and operations; and continuous improvement is now a way of life.
The number of furniture units produced per employee each week has increased
by nearly 40% in the past 16 months. This increase in productivity has allowed
Klaussner to increase wages and benefits, which has boosted employee
engagement and helped the company attract and retain a talented workforce.
All of this is great, but we’re not done getting better.
What are the broader challenges that furniture businesses face today
and how are you mitigating those challenges at Klaussner?
Increases in raw material costs, spiking freight costs and the availability
of skilled labor are probably the three largest challenges for furniture
manufacturers right now, including Klaussner. Our input and freight costs are at
all-time highs and they can increase rapidly. We pass along these cost increases
to our customers through increased prices, but nearly every price increase over
the past six months has been quickly followed by another surge in raw materials
and freight costs. As a result, product pricing has sometimes lagged material
cost increases in 2021, but we expect price increases to offset cost increases
on a full-year basis. Our customers are all well-aware of the current spike in
material and freight costs and understand that price increases are necessary to
keep up with basic costs.
 4   MONOMOY HOME FURNITURE OUTLOOK INTERVIEW WITH TERRY MCNEW, CEO, KLAUSSNER HOME FURNISHINGS | JULY 2021

Discuss how Klaussner continues its focus on new product design in
the current demand environment.
We have revamped how we conduct product development and engineering over
the past 12 months. A full business case for a new product is performed ahead
of time and presented to senior leadership. Additionally, we now complete
a consumer insight study on each proposed new product. This approach has
helped Klaussner streamline our portfolio, reduce development cycle time and
develop new products that the end-use customer wants and will pay for.
Our new Curated Distinctions line of domestic upholstery is a good example
of our new product development process. Under the new system, we offered
three new, higher-price-point collections at the annual “Spring Market” for the
furniture industry a few weeks ago. The new lines were well received by our
retail partners and should produce excellent sales going forward.

What are you most excited about for the future of Klaussner?
We are developing a lean and highly impactful team at Klaussner that is
committed to continuous improvement and industry-leading customer service.
We are growing deeper relationships with our top retail partners that is
manifesting itself in higher wallet share with each of them. We are adding
talent throughout the business, which is improving efficiencies and product
quality. Our manufacturing operations are performing better each month.
Our online presence is increasing and our case goods, import upholstery and
bedding divisions are all growing at double-digit rates.
Klaussner is getting the job done for our customers in the most chaotic supply
chain environment we have ever seen. Once the global supply chain re-
stabilizes, this will get really fun.

 5   MONOMOY HOME FURNITURE OUTLOOK INTERVIEW WITH TERRY MCNEW, CEO, KLAUSSNER HOME FURNISHINGS | JULY 2021

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