2 home improvement retail stocks in spotlight despite industry challenges

The Fed’s decision to keep interest rates unchanged and consumers’ cautious approach to future business conditions are raising concerns among players in the Zacks Retail-Home Furnishings industry. Continued investment in e-commerce, high operating costs and higher raw material costs in the home furnishings market are additional headwinds. However, consumers’ growing desire to shop, effective cost management, continued focus on product innovation, efforts to redesign supply chain networks and rationalize product offerings, and investments in brand merchandising and digital marketing should provide support to companies such as Williams-Sonoma, Inc. WSM and Ethan Allen Interiors Inc. ETD.

Industry Description

The Zacks Retail-Home Furnishings industry includes retailers offering home furnishings in a variety of categories. The product line includes furniture, garden accessories, framed art, lighting, mirrors, candles, tableware, lamps, picture frames, bath products, area rugs, artificial floral products, and baby and teen furnishings. The industry also develops, manufactures, markets, and distributes bedding products. The companies provide home and security products for residential home repair, remodeling, new construction, and security applications. They manufacture, assemble, and sell faucets, accessories, kitchen sinks, and waste disposal.

3 Trends Shaping the Future of Home Furnishings Retail

Interest rate cuts are not inevitable:The Fed is keeping interest rates in a range of 5.25%-5.5% (a 22-year high) from August 2023. While Fed officials have previously hinted at the possibility of up to three rate cuts this year, they are now emphasizing a slower pace compared with their previous decision, depending on inflation. As interest rates remain high, consumers are taking a more cautious approach to their disposable income, which is reflected in the sales report. Sales at furniture and home improvement stores fell 6.8% in May 2024 from a year ago, making it one of the most vulnerable retail sectors tracked by the U.S. government. But the percentage decline was smaller than the 8.9% year-over-year decline in February.

Once again, there was a noticeable decline in the near-term outlook for business conditions. According to the latest June 2024 Census Bureau report from the Department of Commerce, consumer expectations for future business conditions, labor market conditions, and income have worsened. According to the report, 12.5% ​​of consumers expected business conditions to improve, down from 13.7% in May 2024. In addition, there was a slight decline in optimism about the current and future financial situation of the family over the next six months.

Strong competition: The home furnishings industry is highly competitive, with home furnishings stores, specialty stores, antique shops, national and regional home furnishings retailers, and department stores all struggling. Online retailers focused on home furnishings are also a threat. Competitive product prices are eating into margins.

Strong Digital Platform, Product Reinvention and Marketing Moves: Supply chain optimization and improving e-commerce channels are expected to drive the top line. E-commerce will continue to play an important role as people find online shopping more convenient and safe. Product innovation plays a key role in increasing market share in this industry. Companies are looking to create products and partner with established brands and designers to maintain exclusivity. Moreover, customer experiences are being improved through innovative marketing techniques with a focus on digital marketing, better merchandising, store redesigns and loyalty programs.

The story continues

Zacks Industry Rank Indicates Dim 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 #237, putting it in the bottom 5% 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 a result of lower earnings outlooks for the constituent companies collectively. Looking at the earnings estimate revisions, it seems that analysts are gradually losing confidence in the earnings growth potential of this group. As of March 2024, the industry’s earnings estimates for 2024 have fallen to $4.11 per share from $4.98.

Despite the industry’s unclear short-term outlook, here are a few stocks you can consider adding to your portfolio. Before doing so, it’s worth taking a look at shareholder returns and the industry’s current valuation.

The industry is lagging behind the sector and the S&P 500

The Zacks Retail-Wholesale home furnishings industry underperformed both the broader Zacks Retail-Wholesale sector and the Zacks S&P 500 Composite Index over the past year.

The industry is up 4.8%, compared with the broader sector’s 19.5% gain. The Zacks S&P 500 Composite is up 25.1% during that period.

Price performance over one year

Current industry valuation

Based on the forward 12-month price-to-earnings ratio, commonly used to value home improvement retail stocks, the industry stock is currently valued at 13.5, compared to the S&P 500 Index’s 22 and the sector’s 23.2.

As the chart below shows, over the past five years the industry has traded stocks at between 19.4X and 7.1X, with a median of 13.5X.

Industry P/E (12M Forward) vs. S&P 500

2 Interior Design Stocks You Should Keep an Eye on

We have highlighted two companies in the industry that are leveraging their fundamental strengths and have solid growth prospects.

Williams Sonoma: This 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 introductions. Williams-Sonoma is leveraging its strategic focus on expanding product assortments and creating a sustainable operating framework. By adopting a “digital first” approach without relying solely on digital channels, the company has gained a competitive advantage. Its strong e-commerce platform and successful Business-to-Business segment position it for significant expansion, overcoming current consumer spending challenges. The company’s portfolio of brands serving a range of categories, aesthetics and life stages are driving tailwinds.

Shares of WSM — currently a Zacks Rank #3 (Hold) — have gained 57.2% over the past year. The company has topped earnings estimates in each of the last four quarters, with an average of 19.6%. It also has a favorable VGM Score of B, making it a potentially interesting investment opportunity. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and consensus: WSM

Ethan Allen’s Interiors: This Danbury, CT-based company specializes in interior design and the manufacturing and sale of home furnishings. With a broad product line, a strong network of retail design centers, and a commitment to interior design services and technology innovation, the company is thriving. As the company looks ahead to fiscal 2025, it is well-positioned with its diverse product line and the benefits of vertical integration. These strengths include North American manufacturing facilities, a retail network focused on interior design, a reliable logistics system, and a strong financial position that are poised to capitalize on opportunities in the coming year.

ETD shares have lost 9.8% over the past year. This Zacks Rank #3 company’s earnings have topped the consensus estimate in one of the last four quarters and missed it in three other cases, with an average negative surprise of 9%. While the EPS estimate showed a 42.4% year-over-year decline in fiscal 2024, given lower sales reflecting a post-pandemic economy, the same for fiscal 2025 represents a 5.6% year-over-year increase.

Price and Consensus: ETD

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