The Zacks Retail-Home Furnishings industry comprises retailers offering home furnishing products under 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.
Notable companies in the industry include RH (RH), Williams-Sonoma, Inc. (WSM) and Ethan Allen Interiors Inc. (ETH).
Let’s take a look at the industry’s three major themes:
- The industry is highly dependent on economic and U.S. housing market conditions and the recent coronavirus outbreak has roiled global stock markets and in turn the world economy. Home furnishing retailers are expected to be negatively impacted by the outbreak, given the rise in unemployment and drop in spending levels. This is evident from the latest U.S. retail sales data for February that depicts the steepest decline since December 2018. The pandemic is likely to weaken sales in the months ahead that could support economists’ anticipation of a consumer-led recession by the second quarter. Meanwhile, the companies’ businesses highly depend on the successful operation of a global supply chain. The COVID-19 outbreak and response to the health crisis in various countries are likely to have a lingering impact on the supply chain in the near term.
- 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 pose a threat. Competitive product pricing has been eating into 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) as well as higher employment-related expenses could compress margins. Tariff-related woes owing to the U.S.-China trade spat are also likely to impact the industry in the near term.
- Nonetheless, product innovation plays a key decisive factor for market share gain in this industry. Companies aim at coming up with 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 the top line.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Retail-Home Furnishings industry is an eight-stock group within the broader Zacks Retail-Wholesale sector. The industry currently carries a Zacks Industry Rank #241, which places it at the bottom 5% 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 dismal near-term prospects. 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 negative 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 February 2020, the industry’s earnings estimates for 2020 and 2021 have been revised 57.5% and 46.2%, respectively, downward.
Despite the industry’s gloomy near-term view, we will present a few stocks that one can hold on to. Before that, it’s worth taking 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 47.4% compared with the S&P 500’s decline of 14.2% and the broader sector’s 9.4% decrease 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 13.7X compared with the S&P 500’s 15.7X and the sector’s 22.7X.
Over the last five years, the industry has traded as high as 22.8X and as low as 11.8X, with the median being 15.2X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
The novel coronavirus outbreak is expected to negatively impact the top lines of the industry participants in the near term as consumers are restricting their buying habits to only essential items. Also, expenses associated with continued investments in e-commerce, intense competition, and rising freight and raw material costs might keep margins under pressure. Nonetheless, efforts to redesign the supply chain network and rationalize product offerings, and investments in merchandising of brands and digital marketing are expected to drive the industry.
Currently, there is no top-ranked stock in the Zacks universe of retail home furnishing sector that can stand tall despite the weak industry prospects. Nonetheless, investors may also hold on to the following stocks, which currently carry a Zacks Rank #3 (Hold) and have solid earnings prospects. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
At Home Group Inc. (HOME): Headquartered in Plano, TX, this company operates home decor superstores in the United States. The company has a three-five year expected earnings growth rate of 10.1%.
Price and Consensus: HOME
Casper Sleep Inc. (CSPR): The company designs and sells sleep products in the United States, Canada, and Europe. The company has a three-five year expected earnings growth rate of 17.9%.
Price and Consensus: CSPR
The Lovesac Company (LOVE): This Stamford, CT-based home furnishing retailer has a three-five year expected EPS growth rate of 35%.
Price and Consensus: LOVE
Below are two stocks with a bearish Zacks Rank that we would recommend investors to steer clear of for the time being.
Williams-Sonoma, Inc.: This is a San Francisco, CA-based multi-channel specialty retailer. The company has a Zacks Rank #4 (Sell) and its earnings are expected to decline 32.6% this current year.
Price and Consensus: WSM
RH: This Corte Madera, CA-based home furnishings retailer currently has a Zacks Rank #5 (Strong Sell) and its earnings are expected to decline 35.5% this fiscal.
Price and Consensus: RH
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Williams-Sonoma, Inc. (WSM) : Free Stock Analysis Report
RH (RH) : Free Stock Analysis Report
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At Home Group Inc. (HOME) : Free Stock Analysis Report
Ethan Allen Interiors Inc. (ETH) : Free Stock Analysis Report
Casper Sleep Inc. (CSPR) : Free Stock Analysis Report
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