A recovering housing market scenario backed by limited existing inventory, stabilizing mortgage rates and improving builders’ sentiments, is a boon for the Zacks Retail-Home Furnishings industry. However, continued investments in e-commerce, supply-chain bottlenecks and higher raw material costs in the home furnishing market are concerns. Nonetheless, consumers’ increasing desire for shopping, efficient cost management, persistent focus on product innovation, efforts to redesign the supply-chain network and rationalize product offerings as well as investments in merchandising of brands and digital marketing should lend support to companies like Fortune Brands Innovations, Inc. FBIN, Tempur Sealy International, Inc. TPX and Ethan Allen Interiors Inc. ETD.
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, bathware, accent rugs, artificial floral products, and child and teen furnishing. The industry players also develop, manufacture, market and distribute bedding products. The companies provide home and security products for residential home repair, remodeling, new construction, and security applications. They are involved in manufacturing, assembling, and selling faucets, accessories, kitchen sinks, and waste disposal.
3 Trends Shaping the Future of the Retail-Home Furnishings Industry
Strong Digital Platform, Product Reinvention & Marketing Moves: Optimization of the supply chain and improvement in e-commerce channels are expected to drive the top line. In fact, e-commerce will continue to play a major role as people find it more comfortable and safer to shop online. Product innovation plays a pivotal role in market share gain in this industry. Companies aim to come up with products and collaborate with celebrated brands as well as designers to maintain exclusivity. Also, customer experience is being enhanced by innovative marketing techniques, with an emphasis on digital marketing, better merchandising, store remodeling and loyalty programs.
Improving Housing Market, Consumer Spending & Job Growth: The industry has suffered from softness in business trends as a result of the weakness in the housing market thanks to the Federal Reserve’s series of interest rate hikes. Higher mortgage rates took a toll on the housing sector and hence on the furnishing market. Presently, the U.S. homebuilding market is getting a big boost from the lack of existing homes for sale, and that appears to be the overriding the challenges from financial markets. This, along with improving consumer spending and strong jobs growth, is bolstering the future of the home furnishing market. Solid wage gains resulting from a tight labor market have been spurring spending, yet with a more conscious approach.
Inflationary Pressures & Stiff Competition: Accelerating raw material and freight costs (including e-commerce shipping) as well as higher employment-related expenses, have been putting pressure on the companies’ margins. Again, although sales-building initiatives of the industry participants have been reaping positive results, these involve high costs. Industry players have also been grappling with supply-chain bottlenecks. Due to supply issues across the world, these companies have been witnessing some inventory delays, product shortages and manufacturing delays.
Meanwhile, the home furnishings industry is highly competitive, with interior design trade and specialty stores, antique dealers, national and regional home furnishing retailers as well as department stores giving a hard time. Online retailers focused on home furnishing also pose a threat. Competitive product pricing has been eating into margins.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Retail-Home Furnishings industry is a seven-stock group within the broader Zacks Retail-Wholesale sector. The industry currently carries a Zacks Industry Rank #63, which places it in the top 25% 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 outperform the bottom 50% by a factor of more than 2 to 1.
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 Lags Sector, S&P 500
The Zacks Retail-Home Furnishings industry has underperformed the broader Zacks Retail-Wholesale sector and the Zacks S&P 500 composite over the past year.
The industry has lost 3.3% against the S&P 500’s 2% growth. The broader sector has gained 3.2% over this period.
One-Year Price Performance
Industry’s Current Valuation
On the basis of the forward 12-month price-to-earnings ratio, which is commonly used for valuing retail home furnishing stocks, the industry is currently trading at 10 compared with the S&P 500’s 18.4 and the sector’s 21.6.
Over the last five years, the industry has traded as high as 19.43X and as low as 7.09X, with the median being 13.9X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
3 Retail-Home Furnishings Stocks to Watch
We have highlighted two stocks, currently carrying a Zacks Rank #2 (Buy), and one stock with a #3 (Hold). These stocks have been capitalizing on fundamental strengths and have solid growth prospects.
Ethan Allen Interiors: This Danbury, CT-based company engages in interior design, and manufacture and retail of home furnishings. Its wide array of offerings, a strong network of retail design centers and focus on interior design services as well as technological enhancement have been benefiting the company. It remains well-positioned for fiscal 2023 with its product offerings and the advantage of vertical integration, including its North American manufacturing, interior design-focused retail network, a strong logistics network and a healthy balance sheet to maximize opportunities during the year.
ETD’s shares have gained 13% over the past year, outperforming the industry. This Zacks Rank #2 company’s earnings estimates for fiscal 2023 have increased 2.9% to $3.90 per share over the past 30 days. This depicts analysts’ optimism over the company’s growth prospects. ETD’s earnings topped the consensus mark in all of the last four quarters, with the average surprise being 32.3%. Again, it carries an impressive VGM Score of A. This helps to identify stocks with the most attractive value, growth and momentum.
Price and Consensus: ETD
Fortune Brands Innovations: Based in Deerfield, IL, this company provides home and security products for residential home repair, remodeling, new construction, and security applications in the United States and internationally. In the ongoing challenging economic conditions, the company has been focusing on an alteration in cost structure, proficient production planning, protecting margins and improving cash generation in 2023. The company has rebranded its entire company, with a business focused on driving accelerated growth in categories through brand and innovation. It has reorganized the company from a decentralized structure with separate businesses to an aligned operating model that prioritizes activities, which are key to brand, innovation and channel. These transformative changes will enable the company to drive growth in the future.
Although the FBIN stock, carrying a Zacks Rank #2, has declined 11.3% over the past year, this company surpassed earnings estimates in all of the trailing four quarters, the average being 9%. Earnings estimates for 2023 have increased 3% to $3.75 per share over the past 30 days, showcasing analysts’ optimism about the company’s prospects.
Price and Consensus: FBIN
Tempur Sealy International: Headquartered in Lexington, KY, this company is involved in the development, manufacturing and marketing of bedding products. Strong industry demand, its worldwide leadership position in the industry and the omni-channel distribution strategy’s success have been boosting Tempur’s presence. Despite challenging macro conditions, the company has been investing in industry-leading product innovation and advertising spend, expanding manufacturing capacity, driving omni-channel expansion worldwide, and working on a balanced capital allocation strategy. For 2023, the company’s brand, products, and omnichannel initiatives will likely drive growth.
The TPX stock has gained 42.5% over the past year, outperforming the industry. The company carries a Zacks Rank #3 and has an expected earnings growth rate of 3.9% for 2023 and 17.4% for 2024.
Price and Consensus: TPX
5 Stocks Set to Double
Each was handpicked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2021. Previous recommendations have soared +143.0%, +175.9%, +498.3% and +673.0%.
Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.
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