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2 Furniture Stocks Worth Buying Despite Industry Headwinds

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Indeed, the Zacks Furniture industry has been bearing the brunt of supply-chain disruptions, greater inflation, continued investments in e-commerce, macroeconomic and geopolitical uncertainty, and intense competition. However, increasing investments in technological advancements and solutions are expected to drive the industry’s growth. Also, product innovation and accretive buyouts should favor the furniture industry in expanding its global reach. Efficient cost management should lend support to industry players like Flexsteel Industries, Inc. (FLXS - Free Report) and Virco Mfg. Corporation (VIRC - Free Report) .

Industry Description

The Zacks Furniture industry comprises manufacturers, designers and marketers of residential as well as commercial furnishing solutions. Some of the companies provide kitchen and bath cabinets as well as various engineered components and products in the United States, along with international markets. A few industry players also offer specialty rental services such as modular and portable storage solutions as well as modular space and portable storage solutions. They are involved in designing and producing a wide variety of engineered components and products for homes, offices and automobiles. The industry players cater to different sectors, namely, construction, energy, healthcare, security, government, retail, commercial, education and transportation.

3 Trends Shaping the Furniture Industry's Future

Innovation, Digital Marketing & Acquisitions: Product innovation plays a decisive factor for market share gain in this industry. Players are investing in new products to improve the product mix in a competitive landscape and drive top-line growth. Also, millennials represent the largest consumer cohort in the furniture market. More money in the hands of this largest and most-active generation of homebuyers should keep demand elevated. Customer experience is getting enhanced by innovative marketing techniques, emphasizing digital marketing, better merchandising, store remodeling and loyalty programs. Furthermore, the industry players are pursuing acquisitions to broaden their product portfolio and expand their geographic footprint as well as market share.

Soft Demand: Spending on home improvements and repairs is expected to be soft in the near term, given several macroeconomic challenges comprising slowing sales of existing homes, rising mortgage interest rates, and home price appreciation. The slowdown in homebuilding industry, retail sales of building materials, and renovation permits point to a soft environment for residential remodeling, thereby impacting the furniture industry players.

Supply-Chain Issues, Rising Inflation & Higher Expenses: The companies have been witnessing supply-chain disruptions, especially in chemicals, semiconductors, labor and transportation, which are constraining volume growth. As such, consumers are increasingly concerned about rising inflation and many expect inflation to outpace income growth. This would be a risk to spending, which makes up two-thirds of the economy. The industry players are distressed by rising raw material prices and logistic expenses. The labor market has also struggled with limited availability of labor, which is driving labor costs.

Also, the furniture industry is highly competitive, with home furnishing retailers, department stores and antique dealers giving a hard time. Again, companies need to make incremental investments to address an expanding omni-channel environment, as shoppers tend to look for online options. Growth in online sales may continue to dent traditional furniture retailers’ market share as brands such as Etsy, Things Remembered, Costco and Amazon are finding their way into the market.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Furniture industry is an eight-stock group within the broader Zacks Consumer Discretionary sector. The industry currently carries a Zacks Industry Rank #73, which places it at the top 29% 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 impressive near-term prospects. 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.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Outperforms S&P 500 & Sector

The Zacks Furniture industry has outperformed the Zacks S&P 500 composite and the broader Zacks Consumer Discretionary sector over the past year.

Over this period, the industry has lost 10% compared with the broader sector’s 37.9% decline and the S&P 500’s decrease of 19.5%.

One-Year Price Performance

Industry's Current Valuation

On the basis of the forward 12-month price-to-earnings (P/E), which is commonly used for valuing furniture stocks, the industry is currently trading at 16X compared with the S&P 500’s 17X and the sector’s 13.6X.

Over the past five years, the industry has traded as high as 19.3X and as low as 9.4X, with the median being 14.8X, as the chart below shows.

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

2 Furniture Stocks to Buy

We have selected two stocks from the Zacks universe of furniture stocks that currently carries a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Flexsteel Industries: Based in Dubuque, IA, Flexsteel is a manufacturer, importer and online marketer of upholstered furniture for residential and contract markets in the United States. Despite challenges like excess inventory at both retailers and manufacturers, margin pressures from competitive pricing and economic headwinds, the company is expected to benefit from its growth strategy and new products introduction. Notably, FLXS has been delivering industry-leading lead times of 3 to 5 weeks for custom manufactured products.

FLXS’ shares have lost 37.7% in the past year. Earnings of FLXS — a Zacks Rank #1 company — are expected to grow 93.8% in fiscal 2023. Earnings estimates for fiscal 2023 have increased to $1.24 from $1.19 over the past 60 days.

Price and Consensus: FLXS

Virco Mfg.: Headquartered in Torrance, CA, this company designs, produces and distributes furniture in the United States. Although the company has been reeling under material cost increases, and higher costs associated with materials, freight and logistics, VIRC has been witnessing higher demand as stimulus funding aids recovery in the school furniture market. Higher shipments owing to efforts to increase factory output continue to deliver high-quality, innovative equipment and furniture to schools across the United States. Higher revenues have enabled VIRC to witness greater operating leverage, thereby increasing profitability. A higher funding level for public schools, as well as the competitive advantage it has from its domestic production and distribution model, has been enabling VIRC to consistently take market share from overseas competitors.

VIRC’s shares have gained 41.6% in the past year. Earnings of VIRC — a Zacks Rank #2 company — are expected to grow 175.8% in fiscal 2023 (ending January 2023) and 8.3% in fiscal 2024 (January 2024). Earnings estimates for fiscal 2023 have increased to 72 cents from 71 cents over the past seven days.

Price and Consensus: VIRC



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