4 Home Furnishing Retail Stocks to Watch Out For in a Tough Industry

Weak demand conditions, given the slowdown in the real estate market, continued investment in e-commerce, supply chain bottlenecks and higher raw material costs in the home furnishing market, are outweighing effective cost management and continued focus on product innovation. While efforts are being made to redesign the supply chain network and rationalize product offerings, investments in brand merchandising and digital marketing could hurt somewhat. However, players in the Zacks Retail-Home Furnishings industry such as Williams-Sonoma, Inc. WSM- Fortune Brands Innovations, Inc. FBINs Tempur Sealy International, Inc. TPX and Ethan Allen Interiors Inc. (ETD) aim to address these challenges.

Industry Description

The Zacks Retail-Home Furnishings industry includes retailers offering home furnishing products in various categories. The product range includes furniture, garden accessories, art fixtures, lighting, mirrors, candles, tableware, lamps, picture frames, bathware, accent rugs, artificial floral products, and children’s and youth furnishings. Players in the industry develop, manufacture, sell, and distribute bedding products. The companies provide home and safety products for home repair, residential remodeling, new construction, and safety applications. They manufacture, assemble, and sell faucets, accessories, kitchen sinks, and garbage disposal.

3 Trends Shaping the Future of Retail and Home Furnishing

Soft demand: The industry is suffering from an uncertain macro environment, continued softening of business trends due to continued weakness in the housing market and a series of interest rate hikes by the Federal Reserve. Higher mortgage rates are weighing on the housing sector and, by extension, the home improvement market.

Supply chain problems, inflation, intense competition and labor costs:Businesses in the industry are grappling with supply chain bottlenecks. Due to global shipping issues, these companies are experiencing inventory delays, product shortages and production delays. Accelerating raw material and transportation costs (including e-commerce shipping), as well as higher labor costs, are putting pressure on company margins.

Meanwhile, the home furnishings industry is highly competitive, with home furnishings and specialty stores, antique dealers, national and regional home furnishings retailers, and department stores experiencing difficult times. Online stores focused on home furnishings also pose a threat. Competitive product prices reduce margins. Although sales-building initiatives by industry participants bring positive results, they are associated with high costs.

Strong Digital Platform, Product Reinvention and Marketing Moves: Supply chain optimization and streamlining of e-commerce channels are expected to be the major drivers of profits. In fact, e-commerce has saved the retail sector amidst the uncertainty caused by the pandemic. This digital platform will continue to play a major role as people find online shopping more convenient and safe. Product innovation plays a key role in increasing market share in this industry. Companies aim to develop products and collaborate with well-known brands and designers to maintain exclusivity. Moreover, customer experience is improved through innovative marketing techniques, with a focus on digital marketing, better merchandising, store remodeling, and loyalty programs.

The Zacks Industry Rank indicates poor prospects

The Zacks Retail-Home Furnishings industry is a seven-member group within the broader Zacks Retail-Wholesale sector. This industry currently has a Zacks Industry Rank #197, which puts it in the bottom 22% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is essentially the average Zacks Rank of all member stocks, indicates a bleak near-term outlook. 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 position in the bottom 50% of Zacks Ranked industries is driven by the poor earnings outlook for its component companies on a combined basis. Looking at the total earnings estimate revisions, it appears that analysts are gradually losing confidence in the group’s net earnings growth potential. As of December 2022, industry earnings estimates for 2023 and 2024 have been revised downward by 2.7% and 8.9%, respectively.

Despite the uncertain near-term outlook for the industry, we’ll present a few stocks that you might consider adding to your portfolio. Before doing so, it’s worth taking a look at the industry’s shareholder returns and current valuations.

Industry outperforms sector, lagging S&P 500

The Zacks Retail and Home Furnishings industry has outperformed the broader Zacks Retail and Wholesale sector but has underperformed the Zacks S&P 500 Index over the past year.

The industry lost 5.5%, compared with the S&P 500’s 5.3% decline. The broader sector declined 9.7% during that period.

Price performance within one year

Current industry valuation

Based on the forward-looking 12-month price-to-earnings ratio commonly used to value home furnishings stocks, the industry’s stock is currently valued at 11.01, compared to the S&P 500’s 18.2 and the sector’s 21. ,9.

Over the last five years, the industry has traded shares at a range of 19.43X to 7.09X, with the median being 14.05X, as the chart below shows.

Industry P/E ratio (12 months ahead) compared to the S&P 500

4 Interior Design Stocks You Should Keep an Eye on

We’ve highlighted four stocks that currently rank as a Zacks Rank #3 (Hold) and benefit from fundamental strengths. You can see The complete list of today’s Zacks #1 Rank (Strong Buy) stocks can be found here.

Ethan Allen Interiors Inc.: This Danbury, Connecticut-based company is engaged in interior design, manufacturing and retailing of home furnishings. A broad range of offerings, a strong network of retail design centers and a focus on interior design services, as well as technological advancements, benefit the company. The company remains well-positioned for fiscal 2023 with its product offering and the benefits of vertical integration, including manufacturing in North America, a retail network focused on interior design, a strong logistics network and a healthy balance sheet to maximize opportunities throughout the year.

ETD stock has gained 20.7% over the past year, outperforming the industry. Earnings estimates for fiscal 2023 have risen 7.1% to $3.79 a share over the past 60 days, underscoring analysts’ optimism about the company’s growth prospects.

Price and Consensus: ETD

Tempur Sealy International: Based in Lexington, KY, the company is engaged in the development, manufacturing and marketing of bedding products. Strong industry demand, global industry leadership and the success of its omni-channel distribution strategy are strengthening Tempur’s presence. Despite challenging macroeconomic conditions, the company is investing in industry-leading product innovation and advertising spend, increasing production capacity, driving global omni-channel expansion and working on a sustainable capital allocation strategy. In 2023, the company’s brand, products and omni-channel initiatives are expected to drive growth.

TPX stock has gained 47.2% over the past year, outperforming the industry. Earnings estimates for 2023 increased to $2.70 per share from $2.63 over the last 60 days. The company has a Zacks Rank #3 and is expected to grow its earnings by 3.9% in 2023.

Price and consensus: TPX

Fortune Brand Innovations: The Deerfield, IL-based 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 environment, the company is focused on transforming its cost structure, streamlining production planning, protecting margins and improving cash generation in 2023. The company has rebranded its entire business and is focused on accelerating category growth through brand and innovation. It has reorganized the company from a decentralized structure with separate businesses to an aligned operating model that prioritizes brand, innovation and channel-critical activities. These transformational changes will position the company to drive growth into the future.

Although FBIN stock is down 22.7% over the last year, it has an impressive VGM Score of B. This helps identify stocks with the most attractive value, growth, and momentum. This company exceeded earnings estimates in all four quarters, the average was 6.2%.

Price and Consensus: FBIN

Williams-Sonoma: It is a multi-channel specialty retailer based in San Francisco, California. The company is benefiting from its focus on digital initiatives, higher e-commerce penetration and product launches. In addition to continuous improvement of the e-commerce channel, supply chain optimization and disciplined cost control are expected to drive growth.

Although WSM shares are down 13.1% over the past year, they have an impressive VGM Score of B. The home furnishings supplier has topped earnings estimates in three of the last four quarters, with the average being 9.6%.

Price and consensus: WSM

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