Could there be storm clouds ahead for home furnishings retailers in spite of the continued and astonishing strength in the housing industry?
True, Williams-Sonoma Inc. (WSM) just announced this week that its fiscal fourth quarter profits jumped 9.1%, revenue leapt 11%, while total same-store sales rose 4.4%. But the company’s forward-looking comments didn’t measure up to expectations. Analysts had been forecasting that earnings would hit 39 cents a share in its current first quarter, and $2.82 a share for the full fiscal year; Williams-Sonoma, however, was slightly more downbeat, estimating that results will be closer to 33 to 36 cents for the quarter and $2.65 to $2.75 a share for the full year. In recent weeks, Goldman Sachs and Deutsche Bank have cut their recommendations on the stock to a hold from a ‘buy’ previously.
Goldman Sachs also has become more wary of Bed Bath and Beyond (BBBY), in spite of the company’s discount valuation and its ability to generate growth on both the top and bottom lines; back in January it cut its rating to a sell from “neutral”, voicing concerns about everything from a loss of market share to narrowing margins. Sales growth just isn’t what it could or should be – especially for a retailer going head-to-head with Amazon (AMZN) to an ever-growing degree, argued analyst Matthew Fassler in a client note.
Clearly, revenues aren’t growing at the same rapid clip that they were earlier in the cycle. And analysts are in broad agreement that Bed Bath & Beyond lacks an effective strategy in the e-commerce arena, particularly crucial if the company is to fend off Amazon, known here, due to its habit of discounting so aggressively that it ruins competitors' margins and its own, as the Suicide Bomber of Retail. But there is a broader question lingering here: to what extent might a downturn in consumer confidence put a dent in sales growth?
That seems to be part of what is priced in to the stocks of Williams-Sonoma and, to an even greater degree, Bed Bath & Beyond, relative to that of top-performing housing company Lennar (LEN-B). True, the basic metrics of the homebuilding industry look more obviously appealing: year-over-year, new home construction soared 28% as of the end of February. Lennar can point to obvious upside: a 34% jump in orders for new homes in the first quarter, and a dramatic earnings gain for the quarter ended February 28: the company’s reported earnings per share of 26 cents dwarfed not only last year’s 8 cents a share but the consensus analysts’ estimate of 15 cents a share.
There is a degree of certainty that a homebuilder can offer investors that home furnishings retailers simply can’t provide. Even if someone buys a new home, there is no guarantee that they will go ahead and spend on new furnishings – from towels to furniture – to put into it. Indeed, to the extent that consumer confidence wobbles at all, it is more likely to deter purchasers of home furnishings than it is homebuyers. Someone who has made the decision to purchase a new home is likely doing so out of a perceived need, or because they view their finances as being stable enough to manage such a major commitment. They may be cautious, but that wariness is more likely to pop up in their willingness to buy new curtains or rugs, rather than in the purchase of the home itself. Meanwhile, among the non-homebuyers who may be in the market for a new sofa, the prospect that higher payroll taxes and rising gasoline prices will make them more reluctant to spend unless they clearly see the need – and more intent on finding the best possible value when they do. That trend has the potential to eat into margins and sales at home furnishings retailers -- a group that remains trading at a premium to Lennar.
Until now the assumption has been that home furnishings stocks would follow homebuilders higher, even if not in lockstep. It’s worth challenging that assumption, if only to guard against an unpleasant surprise further down the road.
Suzanne McGee, a contributing editor at YCharts, spent nearly 14 years as a reporter at the Wall Street Journal, in Toronto, New York and London. She is also a columnist for The Fiscal Times, and author of "Chasing Goldman Sachs", named one of the best non-fiction books of 2010 by the Washington Post. She can be reached at email@example.com.
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