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Home Furnishing Industry Outlook: Margin Pressure to Continue

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The Zacks Retail-Home Furnishings industry comprises multi-channel specialty retailers of premium home products. The merchandise assortment includes furniture, garden accessories, framed art, lighting, mirrors, candles, tableware, lamps, picture frames, bath ware, accent rugs, artificial floral products, and child and teen furnishing.

Let’s take a look at the industry’s three major themes:

  • Rising Consumer Confidence: The industry is highly sensitive to the strength of the economy and consumer confidence, as these two external factors drive the demand for home furnishing products. A robust job market and consequent rise in disposable income, along with rising consumer confidence, should keep the demand high.
     
  • Focus on Innovation, Marketing & Digitalization: Product innovation plays a significant role in competing with peers for market share in this industry. Companies tirelessly aim at bringing out new products and collaborating with celebrated brands and designers to maintain exclusivity. Also, customer experience is being enhanced through improved and innovative marketing techniques, with emphasis on digital targeted marketing, store remodeling and loyalty programs. Optimization of supply chain and improvement of e-commerce channels are also expected to drive top line growth.
     
  • Intense Competition and Rising Cost: The home furnishings industry is highly competitive with interior design trade and specialty stores, antique dealers, national and regional home furnishing retailers, and department stores giving a hard time. Online retailers focused on home furnishings also give stiff competition. And competitive product pricing has been leading to lower margins. Again, although the sales-building initiatives of the industry participants have been reaping results in a highly competitive landscape, these involve high costs. This apart, increasing raw material and freight costs (including e-commerce shipping) could compress margins.

Zacks Industry Rank Indicates Dull Prospects

The Zacks Retail-Home Furnishings industry is a nine-stock group within the broader Zacks Retail-Wholesale sector. The industry currently carries a Zacks Industry Rank #169, which places it at the bottom 34% 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 a dismal near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the bottom 34% of the Zacks-ranked industries is a result of negative 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 April, the industry’s earnings estimate for the current year has gone down by approximately 3.2%.

Despite the industry’s gloomy near-term view, we will present a few home furnishing stocks that one can hold on to. Before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.

Industry Lags on Stock Market Performance

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

Over this period, the industry has declined 1.5% versus the broader sector’s growth of 12.9% and the S&P 500’s gain of 7.5%.

One-Year Price Performance


 
Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing home furnishing stocks, the industry is currently trading at 14.7X compared with the S&P 500’s 16.6X and the sector’s 22.3X.

Over the last five years, the industry has traded as high as 21.9X and as low as 12.5X, with the median being 16.8X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)


 

Price-to-Earnings Ratio (Past 5 Years)


 
Bottom Line

Efforts to redesign the supply chain network, rationalize product offerings, and invest in merchandising of brands and digital marketing are expected to drive the industry’s growth. However, costs associated with continued investments in e-commerce, intense competition and rising freight as well as raw material costs might keep margin under pressure.

Currently, there is only one Zacks Rank #1 (Strong Buy) stock in the Zacks Retail-Home Furnishings industry that is cashing in on the positive industry fundamentals and witnessing positive earnings estimate revisions.

RH (RH - Free Report) : This Corte Madera, CA-based company carries a Zacks Rank #1. The Zacks Consensus Estimate for earnings for fiscal 2018 has gone up 14% over the past 90 days.
 
Price and Consensus: RH


 

Below are three stocks with a Zacks Rank #3 (Hold) that investors may want to retain in their portfolio for the time being. You can see the complete list of today’s Zacks #1 Rank stocks here.

Kirkland's, Inc. (KIRK - Free Report) : For this Brentwood, TN-based specialty retailer of home décor, the consensus EPS estimate for the current fiscal year 2018 has remained stable over the last 60 days, indicating year-over-year growth of 36.8%.

Price and Consensus: KIRK


 
At Home Group Inc. (HOME - Free Report) : For this Plano, TX-based company, the consensus EPS estimate for the current fiscal year has remained stable over the last 60 days and indicates year-over-year growth of 39.4%.

Price and Consensus: HOME


 

Ethan Allen Interiors Inc. (ETH - Free Report) : The company operates as an interior design company, and manufacturer and retailer of home furnishings in North America, Asia, the Middle East and Europe. For this Danbury, CT-based company, the consensus EPS estimate for the current fiscal year indicates year-over-year growth of 11.1%.

Price and Consensus: ETH


 
 

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