The Zacks Retail-Home Furnishings industry comprises retailers offering home furnishing products in various categories. The merchandise assortment includes furniture, garden accessories, framed art, lighting, mirrors, candles, tableware, lamps, picture frames, bath ware, accent rugs, artificial floral products, and child and teen furnishing. The industry players also develop, manufacture, market and distribute bedding products.
Let’s take a look at the industry’s three major themes:
The industry is highly sensitive to the strength of the economy. A slowing housing market, particularly the high-end segment, in the United States is a pressing concern for home furnishing retailers. However, the players are expected to benefit from a robust job market, and the consequent rise in disposable income and increasing consumer confidence. Again, lower interest rates could support housing and purchase activity.
Product innovation plays a significant role in competing for market share in this industry. Companies tirelessly aim at bringing out new products and collaborating with celebrated brands and designers to maintain exclusivity. Also, customer experience is being enhanced by innovative marketing techniques, with emphasis on digital marketing, store remodeling and loyalty programs. Optimization of supply chain and improvement of e-commerce channels are also expected to drive top-line growth.
The home furnishings industry is highly competitive, with interior design trade and specialty stores, antique dealers, national and regional home furnishing retailers, and department stores giving a hard time. Online retailers focused on home furnishing also give stiff competition. Competitive product pricing has been leading to lower margins. Also, even though sales-building initiatives of the industry participants have been reaping results, these involve high costs. Increasing raw material and freight costs (including e-commerce shipping) and higher employment-related expenses could compress margins. Importantly, the increased tariff from 10% to 25% in mid-June will also likely be impacting the industry through the remainder of the year.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Retail-Home Furnishings industry is a nine-stock group within the broader Zacks Retail-Wholesale sector. The industry currently carries a Zacks Industry Rank #165, which places it at the bottom 35% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates a dismal near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of bleak earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since March 2019, the industry’s earnings estimates for 2019 and 2020 have been revised 36.7% and 10.7%, respectively, downward.
Despite the dull scenario, we will present a few stocks that can be bought or retained, considering their robust growth endeavors. Prior to that, let’s take a look at the industry’s shareholder returns and current valuation.
Industry Lags S&P 500 and Sector
The Zacks Retail-Home Furnishings industry has underperformed both the broader Zacks Retail-Wholesale Sector as well as the Zacks S&P 500 composite over the past year.
The industry has lost 7.5% against the S&P 500’s increase of 3.8% and the broader sector’s 2.2% growth over this period.
One-Year Price Performance
Industry’s Current Valuation
On the basis of forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing home furnishing stocks, the industry is currently trading at 17.4X compared with the S&P 500’s 17.2X and the sector’s 24.3X.
Over the last five years, the industry has traded as high as 21.9X and as low as 12.4X, with the median being 16.6X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
Efforts to redesign the supply chain network, rationalize product offerings, and invest in merchandising of brands and digital marketing are expected to drive the industry’s growth. However, costs associated with continued investments in e-commerce, intense competition and rising freight and raw material costs might keep margins under pressure.
Currently, there are only three Zacks Rank #2 (Buy) stocks in the Zacks Retail-Home Furnishings industry that are cashing in on the positive industry fundamentals.
RH (RH): This Corte Madera, CA-based home furnishings retailer’s Zacks Consensus Estimate for fiscal 2019 earnings has gone up 7.8% over the past 60 days.
Price and Consensus: RH
Tempur Sealy International, Inc. (TPX): Based in Lexington, KY, this company develops, manufactures, markets and distributes bedding products. The Zacks Consensus Estimate for fiscal 2019 earnings has gone up 0.9% over the past 60 days.
Price and Consensus: TPX
Williams-Sonoma, Inc. (WSM): This is a San Francisco, CA-based multi-channel specialty retailer. The company delivered a positive average earnings surprise of 8.7% in the trailing four quarters. The Zacks Consensus Estimate for fiscal 2019 earnings has gone up 2% over the past 60 days.
Price and Consensus: WSM
Investors may hold on to the following stocks, which currently carry a Zacks Rank #3 (Hold) and have solid earnings growth prospects. You can see the complete list of today’s Zacks #1 Rank stocks here.
Ethan Allen Interiors Inc. (ETH): This is a Danbury, CT-based leading interior design company, and manufacturer and retailer of quality home furnishings. The stock has an expected earnings growth rate of 17.8% for fiscal 2019.
Price and Consensus: ETH
Pier 1 Imports, Inc. (PIR): Based in Fort Worth, TX, this company engages in the retail sale of decorative accessories, furniture, candles, housewares, gifts and seasonal products. Loss estimates for the current year have narrowed down to $42.58 per share from $38.60 over the past 60 days.
Price and Consensus: PIR
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