Home Furnishing Industry’s Near-Term Prospects Look Bright

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 has been benefiting from stimulus checks and the reopening of the economy. This is evident from the latest U.S. retail sales data for June that showcased a sharp rebound from the steep fall witnessed in April and March, when strict lockdown measures were imposed to contain the spread of coronavirus. Again, this industry, which is highly dependent on economic and U.S. housing market conditions, is expected to gain from the housing market rebound. The recent decline in mortgage rates has been driving new home sales, which in turn should provide a modest spike in home furnishing activity in the near term.
     
  • Moreover, product innovation plays a key 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, better merchandising, store remodeling and loyalty programs. Optimization of supply chain and improvement of e-commerce channels are also expected to drive the top line.
     
  • However, renewed fears of a second wave of the virus may impact industry participants in the near term. Also, 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. Along with these headwinds, 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.

Zacks Industry Rank Indicates Bright 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 #24, which places it at the top 10% 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 bright 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 top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. Since June 2020, the industry’s earnings estimates for 2020 and 2021 have been revised 35.6% and 17.4%, respectively, upward.

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

Industry Outperforms S&P 500, Lags Sector

The Zacks Retail-Home Furnishings industry has outperformed the Zacks S&P 500 composite but lagged the broader Zacks Retail-Wholesale sector over the past year.

The industry has risen 29.4% compared with the S&P 500’s growth of 16.6% and the broader sector’s 40.1% increase 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 19.5X compared with the S&P 500’s 22.8X and the sector’s 18.6X.

Over the last five years, the industry has traded as high as 25.5X 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

Bottom Line

Although new spikes in COVID-19 cases, continued investments in e-commerce and intense competition might keep margins under pressure, the reopening of the economy, improving housing market fundamentals, efficient cost management and continued focus on product innovation are expected to drive the industry. Also, efforts to redesign the supply chain network and rationalize product offerings, and investments in merchandising of brands and digital marketing bring hope.

Here we present five stocks from the Zacks universe of retail home furnishing sector, which carry a Zacks Rank #1 (Strong Buy) or 2 (Buy), and are well positioned to capitalize on the opportunities. You can see the complete list of today’s Zacks #1 Rank stocks here.

Tempur Sealy International, Inc. (TPX): Headquartered in Lexington, KY, this company is involved in the development, manufacturing and marketing of bedding products. The company sports a Zacks Rank #1 and has an expected earnings growth rate of 35.9% for 2020.

Price and Consensus: TPX

At Home Group Inc. (HOME): Headquartered in Plano, TX, this company operates home decor superstores in the United States. The company, a Zacks Rank #2 stock, has an expected earnings growth rate of 161.4% for fiscal 2021.

Price and Consensus: HOME

Casper Sleep Inc. (CSPR): The company designs and sells sleep products in the United States, Canada, and Europe. This Zacks Rank #2 company’s bottom line is expected to grow 72.8% this year.

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% and carries a Zacks Rank #2.

Price and Consensus: LOVE

Williams-Sonoma, Inc.: This is a San Francisco, CA-based multi-channel specialty retailer. The company has a Zacks Rank #2 and has a trailing 12-month return on equity (ROE) of 31.9% compared with the industry’s 1.6%.

Price and Consensus: WSM

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WilliamsSonoma, Inc. (WSM) : Free Stock Analysis Report
 
Tempur Sealy International, Inc. (TPX) : Free Stock Analysis Report
 
RH (RH) : Free Stock Analysis Report
 
The Lovesac Company (LOVE) : Free Stock Analysis Report
 
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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