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Textile-Home Furnishing Outlook: Innovation to Fuel Growth

Zacks Equity Research

The Zacks Textile-Home Furnishing Industry comprises manufacturers, designers, distributors and marketers of flooring, carpet and upholstery products. The products include carpet, rugs, ceramic tile, laminate, wood, stone and vinyl flooring in the United States and worldwide. Through a network of independently commissioned sales representatives, these industry players sell their products through independent distributors, retailers, and wholesalers, specialty stores and home centers.

Let’s take a look at the industry’s three major themes:

  • Though the housing market slowdown in the United States has made the operating backdrop a bit difficult for the industry players, the companies are registering higher demand courtesy of an increase in disposable income, lower unemployment rate and improving consumer confidence. Higher construction spending activity has turned out to be a boon for the Textile-Home Furnishing industry, boosting companies’ revenues and profits.
     
  • The industry participants have been increasing sales with product innovation and expanded distribution in a highly competitive market. The companies are trying hard to offset higher costs by raising prices, expanding in growing channels, and foraying into new product categories and geographies. The companies are also actively pursuing accretive acquisitions in order to broaden their product portfolio and expand geographic footprint as well as market share.
     
  • On the flip side, rising raw material costs, higher transportation costs, a stronger dollar and a tight labor market have been hurting profit margins. Flat home sales activity and rising mortgage rates are deflating owners’ interest in making major investments in home improvements right now, thereby hurting their top line. Meanwhile, significant initial investments in new products, distribution network and manufacturing facilities amid a highly competitive landscape raise concerns. Moreover, the threat of tariffs on imports and retaliatory tariffs on exports spell trouble for the industry. If tariffs are implemented, home furnishing manufacturers will face sourcing difficulties, which will end up increasing costs.


Zacks Industry Rank Indicates Favorable Outlook

The Zacks Textile-Home Furnishing industry is a six-stock group within the broader Zacks Consumer Discretionary sector. The industry currently carries a Zacks Industry Rank #72, which places it in the top 29% 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 impressive 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.

Before we present a few stocks that you may want to consider, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Lags Sector & S&P 500

The Zacks Textile-Home Furnishing industry has lagged the broader Zacks Consumer Discretionary sector as well as the Zacks S&P 500 composite over the past year.

The industry has declined 55.1% over this period compared with the broader sector’s decrease of 4.3%. The S&P 500 has risen 2.4% in the said time frame.

One-Year Price Performance

 

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings ratio, which is a commonly used multiple for valuing these stocks, the industry is currently trading at 9.8X versus the S&P 500’s 16.5X and the sector’s 17.6X.

Over the past five years, the industry has traded as high as 19.4X, as low as 15.9X and at the median of 9X, as the chart below shows.

Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
 


Bottom Line

Indeed, the industry has been grappling with increased expenses. Margins remain under pressure as raw material, transportation and labor costs continue to rise. That said, a major boost in construction spending appears conducive to the industry’s growth. Also, efficient cost management along with continued focus on product innovation is expected to drive growth.

Currently, there is only one stock that is cashing in on the positive economic fundamentals and is witnessing positive earnings estimate revisions. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Dunelm Group plc (DNLMY): Based in Syston, the United Kingdom, this company engages in the retail of homewares. The stock carries a Zacks Rank #2 (Buy) and has an expected earnings growth rate of 9.3% for 2019. Over the past 60 days, the Zacks Consensus Estimate for 2019 EPS has risen 1.7%.

Investors may hold on to the following stocks, which currently carry a Zacks Rank #3 (Hold) and have solid earnings growth prospects.

Interface, Inc. (TILE): Headquartered in Atlanta, GA, Interface’s bottom line is expected to witness 15.9% growth in 2019. The company delivered positive average earnings surprise of 3.3% for the trailing four quarters.

Select Interior Concepts, Inc. (SIC): Headquartered in Anaheim, CA, this company installs and distributes interior building products for residential interior design services markets. It has an expected earnings growth rate of 15.9% for 2019.

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