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4 Retail Home Furnishing Stocks to Watch Amid Industry Woes

Soft demand conditions, given the housing market slowdown, continued investments in e-commerce, supply-chain bottlenecks and higher raw material costs in the home furnishing market are overriding efficient cost management and persistent focus on product innovation. While efforts are being taken to redesign the supply-chain network and rationalize product offerings, investments in merchandising of brands and digital marketing may hurt somewhat. However, Zacks Retail-Home Furnishings industry players such as Williams-Sonoma, Inc. WSM, Fortune Brands Home & Security, Inc. FBHS, Ethan Allen Interiors Inc. ETD and FGI Industries Ltd. FGI are looking to overcome the challenges.

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

Soft Demand: The industry has been suffering from an uncertain macro environment, continued softening in business trends as a result of ongoing weakness in the housing market and the Federal Reserve’s series of interest rate hikes. Higher mortgage rates are taking a toll on the housing sector and the furnishing market as well.

Supply-Chain Issues, Stiff Competition & Labor Expenses: Industry players have 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. 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.

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. Even though sales-building initiatives of the industry participants have been reaping positive results, these involve high costs.

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 rescued the retail sector amid pandemic-induced uncertainties. This digital platform will continue to play a major role as people find it more comfortable and safer to shop online. Product innovation plays a key 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 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 #194, which places it in the bottom 22% 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 dull 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 bottom-line growth potential. Since May 2022, the industry’s earnings estimates for 2022 have been revised 4.2% downward.

Despite the industry’s dim 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 Lags Sector, S&P 500

The Zacks Retail-Home Furnishings industry has underperformed the broader Zacks Retail-Wholesale sector as well as the Zacks S&P 500 composite over the past year.

The industry has lost 31.8% compared with the S&P 500’s 8.8% decline. The broader sector has declined 20.6% 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 8.8 compared with the S&P 500’s 17.7 and the sector’s 23.3.

Over the last five years, the industry has traded as high as 19.4X and as low as 6.9X, with the median being 14.5X, as the chart below shows.

Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500

4 Retail-Home Furnishings Stocks to Watch

We have highlighted four stocks currently carrying a Zacks Rank #3 (Hold) and capitalizing on fundamental strengths. You can see the complete list of today’s Zacks #1 Rank stocks here.

FGI Industries: Based in East Hanover, NJ, this company is a global supplier of kitchen and bath products. Continued strength in the Sanitaryware and Other categories, comprising shower systems and custom kitchen cabinetry, has been benefiting the company. This trend has been strong in Canada, while the United States and Europe have been witnessing a modest rise. Strong revenue growth, backed by the company’s portfolio of innovative and high-quality products, has been offsetting challenges like supply chain disruptions, investments in organic growth initiatives and incremental public company costs.

FGI has an expected earnings growth rate of 4.8% for 2023. Yet earnings for 2022 are expected to decline 53.3% due to the abovementioned headwinds. Its shares have lost 34.4% over the past year. That said, FGI has seen an upward estimate revision of 10.5% for 2022 earnings over the past 60 days. This depicts analysts’ optimism over the company’s prospects.

Price and Consensus: FGI



Fortune Brands Home & Security: Headquartered in Deerfield, IL, Fortune Brands specializes in designing, manufacturing and selling home and security products, mainly in the kitchen and bath cabinetry, plumbing and accessories, entry door systems, and security products applications. The company’s strong fundamentals, comprising strength across brands and innovation, transformational efforts, pricing actions, and cost-control measures are expected to benefit it in the long term. Strong order volumes and elevated backlog levels should continue to act as catalysts to the company’s growth.

FBHS has an expected earnings growth rate of 12% for 2022. Its shares have lost 36.1% over the past year. That said, FBHS has seen an upward estimate revision of 0.2% for 2022 earnings and 1.4% for 2023 earnings over the past 30 days.

Price and Consensus: FBHS

 

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, optimization of the supply chain and disciplined cost control are expected to drive growth.

Williams-Sonoma stock has declined 22.2% over the past year. That said, earnings estimates for the current year have moved 3.1% north over the past 30 days. The company has an expected earnings growth rate of 11.6% for fiscal 2022.

Price and Consensus: WSM

Ethan Allen Interiors: This Danbury, CT-based company operates as an interior design company and manufacturer and retailer of home furnishings. Its wide array of offerings, a strong network of retail design centers and focus on interior design services as well as technology enhancement have been benefiting the company. Recently, it reported solid results for the fourth quarter of fiscal 2022, showing the strength of its vertical integration, strong order backlogs and increased production capacity. It remains well-positioned for fiscal 2023 with its product offerings, 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 declined 10.3% over the past year, outperforming the industry. Earnings estimates for fiscal 2023 have remained stable at $2.95 per share over the past 60 days.

Price and Consensus: ETD


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WilliamsSonoma, Inc. (WSM) : Free Stock Analysis Report
 
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FGI Industries Ltd. (FGI) : Free Stock Analysis Report
 
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