Hicksville, N.Y.—“The first half has been pretty much stellar for everyone I know,” said Mike Riley, executive vice president of sales and marketing for Sphinx by Oriental Weavers, as he and other area rug mill executives weighed in on how the first part of 2004 has gone thus far and what’s ahead for the second six months. Indeed, despite the on-going conflict in Iraq and threats of terrorism here and abroad, things are looking up in the area rug business. “The first half was better than good,” said Jeff Meadows, divisional vice president for Shaw Living/Shaw Rugs. “It was very strong. In fact, our first quarter was extremely good. We were way up over last year—in the 40% range. It’s been quite a jump, not just a steady increase.”

Added Merle Johnson, vice president of marketing for Mohawk Home, “The first half of 2004 was definitely better than last year in terms of our placements and our reorders.” The first quarter was especially strong. But as gas prices rise and interest rates continue to creep upwards, executives have noticed that sales have begun slowing slightly. “We were up 20% in our first quarter,” said Riley. “We’re up about 12% now.” Nonetheless, officials are still optimistic. The bright outlook is due, in part, to improvements in the economy. Building is reportedly up three times what was expected for this year. Housing starts were at the 2.01 million rate in March, according to the Commerce Department. And building permits, a sign of builders’ confidence in the market, rose 1.2% in April to an annual rate of just under 2 million. The permits were up 11% from 2003 levels.

“Single family housing starts, which correlate closely with changes in average mortgage rates, remain robust for now,” said Gina Martin, economist with Wachovia Securities in a May 18, 2004, edition of “CNN Money.” “We should start to see this series moderate in future months as higher mortgage rates keep a lid on borrower interest. However, mortgage rates have plenty of room to move before they even reach pre-recession levels. As a result, we may not see a slowdown in housing construction until the autumn months of this year.” And the more homes that are built and added to, the more area rugs are needed to cover the hard flooring surfaces currently popular, believes Johnson. “The trend is to spend more money on homes, to nest, rather than to travel right now. Area rugs are strong when other businesses may not be. They are an easy, affordable way to change or update a look—a quick fix.”

“Lumber prices are rising, but as long as interest rates stay fairly low, I think people will continue to build and furnish their homes,” said Meadows. The general consensus, as well, is that color will continue to have a strong impact with area rug customers, and transitional and contemporary styles still have immediate appeal. “Even though traditional remains strong for our Karastan division,” said Johnson, “we introduced the Studio Line for a trendier, younger customer. We want to give customers fun, easy ways to change a room.” Likewise, new contemporary shaped braids have faired well for Capel. Tempo and Andes were key contemporary introductions for the company this year. Both are hand-tufted and offer patterns reminiscent of modern art paintings in color palettes of terra cottas, scarlets, blacks, golds and lime. Made from 100% semi-worsted wool, these rugs retail for approximately $600 for a 5X8-ft.

With their licensed lines being hits for the first half of 2004, Shaw and Sphinx have each determined this is a good direction for their companies in allowing them to capture additional sales. Shaw continues to have success with its three Kathy Ireland collections: Essentials, Gallery and Aloha. These lines were updated this season with about a half dozen new looks. In addition, the company maintains a number of other high-profile license agreements, such as the recently signed one with teen stars Mary-Kate and Ashley. Sphinx introduced its first licensed line through the Andy Warhol Foundation. “This contemporary line is doing extremely well,” said Riley. Meadows contended that one reason his company has faired well so far this year is because it took a different approach to marketing its product.

While the company exhibited at the two shows in Atlanta as well as at the two in High Point, N.C., “we also did 34 regional shows around the country for our customers [in conjunction with our parent company]. We went closer to their businesses— in convention centers and at hotels ( FCNews, March 1/8). It was so successful that we think we will do it again next year.” Area rug companies expect the second half of this year will not have the frenzy of activity that was generated in the first quarter, but do anticipate steady growth. “The first quarter was just an anomaly,” said Riley. “Everybody rocked. We anticipate a steady increase the second half and expect to end up well ahead of last year.” “I don’t see anything much different affecting the second half,” said Meadows.

“The economy is getting better, jobs are being created. We project sales to be just as good.” One concern though, admitted Meadows, is the rising cost of raw materials. “The cost of oil was $28 a barrel last year and it hit $42 the first week in June. That puts a bunch of pressure on the profitability of a business.” But, he observes, the more positive flip side is, “Independent flooring dealer growth is very solid right now. They’re growing at about a 20% clip. That’s better than the residential home furnishings dealers. And service levels are very high overall. Rugs that are not in stock can be shipped in two to three days—that’s very appealing to consumers.”