Furniture: The Worst May Be Over

Two seemingly unlikely candidates are sitting near the top of the Zacks Industry Rank List: Furniture and Retail-Home Furnishings.

Given the macroeconomic environment, it would be reasonable to assume that people are not spending on furniture. The numbers support this assessment. La-Z-Boy (LZB - Snapshot Report) recently reported an 18.3% drop in quarterly net sales. Ethan Allen (ETH - Snapshot Report) experienced a 41% drop.

Yet, several analysts have recently raised their fiscal 2010 profit forecasts on both companies.

The Worst May Be Over

Though the furniture industry is certainly not healthy right now, there are signs that the worst of the storm may have passed.

Bottom-line results for both companies surpassed expectations. ETH's positive surprise was its first in 4 quarters. The company lost 23 cents per share, 2 cents less than analysts had feared. LZB earned 5 cents per share, its second consecutive positive surprise.

The housing industry is moving towards stabilization. Both existing and new home sales have risen for 4 consecutive months. Though the increases are not large enough to spur significant increased demand for furniture, they are helping.

Most importantly, the economy is turning a corner. Consumer confidence has been negatively impacted by fears about job losses. Though the unemployment rate is continuing to rise, employers are cutting fewer jobs than they have in the past.

Opportunities in Furniture Companies

Though conditions continue to remain difficult for the furniture industry, analysts have been raising profit projections on several furniture-related companies. These positive revisions are creating a trading opportunity for investors with a high tolerance for risk.

Within the Furniture industry group, analysts have recently raised full-year earnings estimates on LZB, Herman Miller (MHLR) and Select Comfort (SCSS - Snapshot Report). In the Retail-Home Furnishings industry group, analysts have raised forecasts on ETH, Kirklands (KIRK - Analyst Report) and Williams-Sonoma (WSM - Snapshot Report).

Charles Rotblut, CFA, is the senior market analyst for Zacks.com. He can be reached at crotblut@zacks.com.