Yahoo Finance 2 Retail Home Furnishing Stocks to Watch Despite Industry Woes
Although improved housing market conditions and increasing consumer confidence are encouraging, the Fed’s decision to hold interest rates steady and consumers’ cautious approach for future business conditions are concerns for the Zacks Retail-Home Furnishings industry players. Continued investments in e-commerce and higher raw material costs in the home furnishing market are added headwinds. However, consumers’ increasing desire for shopping, efficient cost management, a persistent focus on product innovation, efforts to redesign the supply-chain network and rationalize product offerings as well as investments in the merchandising of brands and digital marketing should lend support to companies like Williams-Sonoma, Inc. WSM and Ethan Allen Interiors Inc. ETD.
Industry Description
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
Rate Cuts are Not Imminent: On Mar 20, 2024, the Fed announced its decision to maintain interest rates in the range of 5.25%-5.5% (the highest level in 22 years), a position held since August 2023. While Fed officials earlier hinted at the possibility of up to three rate cuts this year, they now emphasized a slower pace compared to the previous decision depending on the inflation level. Despite ongoing concerns about inflation and high interest rates affecting Americans, Fed chairman Jerome Powell stated that the central bank is not yet prepared to reduce borrowing costs. Again, furniture and home furnishing store sales fell 6.1% in March compared to last year, representing one of the most challenged retail sectors tracked by the U.S. government. Yet, the percentage drop was less than the 8.9% year-over-year decrease in February. As interest rates remain elevated, consumers are adopting a more cautious stance toward their disposable income, which is echoed in the sales report.
Despite recent increases in U.S. consumer confidence driven by growing optimism about the economy and job market, there has been a notable decline in the short-term outlook for business conditions. According to the most recent report from the Commerce Department's Census Bureau in March, consumers' expectations regarding future business conditions, labor market conditions, and income have all worsened. Additionally, there has been a slight decrease in optimism regarding current and future family financial situations over the next six months. Per the report, 17.6% of consumers expect short-term business conditions to worsen, up from 16.9% in February 2024.
Stiff Competition: The home furnishing 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.
Strong Digital Platform, Product Reinvention & Marketing Moves: The optimization of the supply chain and an improvement in e-commerce channels are expected to drive the top line. 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 and 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.
Zacks Industry Rank Indicates Dull 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 #200, which places it in the bottom 21% 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 bleak 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.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a lower 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 January 2024, the industry’s earnings estimates for 2024 have decreased to $4.94 per share from $5.07.
Despite the industry’s blurred near-term view, we will present a few stocks that one may consider adding to their portfolio. Before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.
Industry Outperforms the Sector & S&P 500
The Zacks Retail-Home Furnishings industry has outperformed the broader Zacks Retail-Wholesale sector and the Zacks S&P 500 Composite over the past year.
The industry has risen 56% compared with the broader sector’s 22.9% growth. The Zacks S&P 500 Composite has gained 20.8% 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 15 compared with the S&P 500’s 20.1 and the sector’s 21.9.
Over the last five years, the industry has traded as high as 19.4X and as low as 7.1X, with the median being 13.6X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
2 Retail-Home Furnishings Stocks to Watch
We have highlighted two stocks from the industry that are capitalizing on fundamental strengths and have solid growth prospects. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Williams-Sonoma: This is a San Francisco, CA-based multi-channel specialty retailer. The company has been benefiting from its focus on digital initiatives, higher e-commerce penetration and product introductions. In addition to the continued enhancement of the e-commerce channel, the optimization of the supply chain and disciplined cost control are expected to drive growth. Despite an increasingly promotional environment and softening industry metrics, WSM has been leveraging its market advantages and focusing on regular-price selling, driving improved customer service, B2B initiative, expansion plans and controlling costs. The company’s portfolio of brands serving a range of categories, aesthetics and life stages are tailwinds.
The WSM stock — currently carrying a Zacks Rank 2 (Buy) — has gained 132.7% over the past year. Estimates for WSM’s fiscal 2024 earnings have increased to $15.37 per share from $15.30 over the past 30 days, showcasing analysts’ optimism about the company’s prospects. This company surpassed earnings estimates in all the trailing four quarters, the average being 10.3%. It also has a favorable VGM Score of A, making it a potentially interesting investment opportunity.
Price and Consensus: WSM
Ethan Allen Interiors: This company, headquartered in Danbury, CT, specializes in interior design and the production and sale of home furnishings. With an extensive range of products, a robust network of retail design centers, and a dedication to interior design services and technological innovation, the company has been thriving. As it looks ahead to fiscal year 2025, it is well-prepared with its diverse product line and the benefits of vertical integration. These advantages include its North American manufacturing facilities, a retail network focused on interior design, a dependable logistics system, and a strong financial position, all poised to seize opportunities in the coming year.
ETD shares have rallied 20.4% over the past year. This Zacks Rank #3 (Hold) company’s earnings topped the consensus mark in two of the last four quarters and missed on other two occasions, with the average surprise being 0.1%. Although estimated EPS showcased a 33% year-over-year decline for fiscal 2024, given lower sales reflecting the post-pandemic economy, the same for fiscal 2025 depicts 9.3% growth year over year.
Price and Consensus: ETD
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Williams-Sonoma, Inc. (WSM) : Free Stock Analysis Report
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