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2 Retail Home Furnishing Stocks to Watch Amid Industry Woes
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Although improved housing market conditions, increasing consumer confidence on the back of expectations of series rate cuts and moderating inflation are encouraging, the Fed’s decision of holding interest rates steady and consumer’s cautious approach are concerns for the Zacks Retail-Home Furnishings industry players. Continued investments in e-commerce and higher raw material costs in the home furnishing market are added headwinds. However, consumers’ increasing desire for shopping, efficient cost management, a persistent focus on product innovation, efforts to redesign the supply-chain network and rationalize product offerings as well as investments in the merchandising of brands and digital marketing should lend support to companies like Fortune Brands Innovations, Inc. (FBIN - Free Report) and Tempur Sealy International, Inc. (TPX - Free Report) .
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
Rate Cuts Are Not Imminent: On Jan 31, 2024, the Fed announced its decision to maintain interest rates within the range of 5.25%-5.5% (the highest level in 22 years), a position held since August 2023. While Fed officials earlier hinted at the possibility of up to three rate cuts this year, they now emphasized a slower pace compared to the previous decision depending on the inflation level. Again, although December 2023 retail sales ticked up due to a seasonal factor, furniture and home furnishing stores sales fell 1% from November and 4.7% from a year ago. As interest rates remain elevated, consumers are adopting a more cautious stance toward their disposable income, which is echoed in the sales report.
Although U.S. consumer confidence has been increasing in recent times (as Americans grew more upbeat about the economy and the job market amid more optimistic views about inflation), consumers were less optimistic about the short-term business conditions outlook. Notably, per the latest January Commerce Department's Census Bureau report, 16.6% of consumers expect short-term business conditions to improve, down from 18.7% in December 2023.
Stiff Competition: The home furnishing 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.
Strong Digital Platform, Product Reinvention & Marketing Moves: The optimization of the supply chain and an improvement in e-commerce channels are expected to drive the top line. E-commerce will continue to play a major role as people find it more comfortable and safer to shop online. Product innovation plays a pivotal role in market share gain in this industry. Companies aim to come up with products and collaborate with celebrated brands and designers to maintain exclusivity. Also, customer experience is being enhanced by innovative marketing techniques, with an 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 six-stock group within the broader Zacks Retail-Wholesale sector. The industry currently carries a Zacks Industry Rank #206, which places it in the bottom 18% 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 lower 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 October 2023, the industry’s earnings estimates for 2024 have decreased to $5.64 per share from $5.90.
Despite the industry’s blurred 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 Outperforms the Sector & S&P 500
The Zacks Retail-Home Furnishings industry has outperformed the broader Zacks Retail-Wholesale sector and the Zacks S&P 500 Composite over the past year.
The industry has risen 24.8% compared with the broader sector’s 21.3% growth. The Zacks S&P 500 composite has gained 20.7% 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 13.4 compared with the S&P 500’s 20.6 and the sector’s 22.9.
Over the last five years, the industry has traded as high as 19.4X and as low as 7.1X, with the median being 13.4X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
Tempur Sealy International: Headquartered in Lexington, KY, this company is involved in the development, manufacturing and marketing of bedding products. Its omni-channel distribution strategy’s success has been boosting Tempur’s presence. Despite challenging macro conditions, the company has been investing in industry-leading product innovation and advertising spend, expanding manufacturing capacity, driving omni-channel expansion worldwide, and working on a balanced capital allocation strategy. For 2024, the company’s brand, products, and omnichannel initiatives will likely drive growth.
The TPX stock has gained 19.9% over the past year. The company carries a Zacks Rank #2 (Buy) and has an expected earnings growth rate of 17.5% for 2024. Estimates for 2024 earnings have increased to $2.83 per share from $2.78 over the past 30 days. This company surpassed earnings estimates in three of the trailing four quarters, the average being 2.4%.
Price and Consensus: TPX
Fortune Brands Innovations: Based in Deerfield, IL, this company provides home and security products for residential home repair, remodeling, new construction and security applications in the United States and internationally. Amid the ongoing challenging economic conditions, the company has been focusing on an alteration in the cost structure, proficient production planning, protecting margins and improving cash generation. The company has rebranded its entire company, with a business focused on driving accelerated growth in categories through brand and innovation. It has reorganized the company from a decentralized structure with separate businesses to an aligned operating model that prioritizes activities that are key to brand, innovation and channel. These transformative changes will enable Fortune Brands Innovations to drive growth in the future.
The FBIN stock has risen 20.3% over the past year. This company, carrying a Zacks Rank #3 (Hold), surpassed earnings estimates in all the trailing four quarters, the average being 9.1%. Estimates for 2024 earnings have increased to $4.25 per share from $4.18 over the past 60 days. The estimated figure indicates 8.7% year-over-year growth. It also has a favorable VGM Score of A, making it a potentially interesting investment opportunity.
Price and Consensus: FBIN
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2 Retail Home Furnishing Stocks to Watch Amid Industry Woes
Although improved housing market conditions, increasing consumer confidence on the back of expectations of series rate cuts and moderating inflation are encouraging, the Fed’s decision of holding interest rates steady and consumer’s cautious approach are concerns for the Zacks Retail-Home Furnishings industry players. Continued investments in e-commerce and higher raw material costs in the home furnishing market are added headwinds. However, consumers’ increasing desire for shopping, efficient cost management, a persistent focus on product innovation, efforts to redesign the supply-chain network and rationalize product offerings as well as investments in the merchandising of brands and digital marketing should lend support to companies like Fortune Brands Innovations, Inc. (FBIN - Free Report) and Tempur Sealy International, Inc. (TPX - Free Report) .
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
Rate Cuts Are Not Imminent: On Jan 31, 2024, the Fed announced its decision to maintain interest rates within the range of 5.25%-5.5% (the highest level in 22 years), a position held since August 2023. While Fed officials earlier hinted at the possibility of up to three rate cuts this year, they now emphasized a slower pace compared to the previous decision depending on the inflation level. Again, although December 2023 retail sales ticked up due to a seasonal factor, furniture and home furnishing stores sales fell 1% from November and 4.7% from a year ago. As interest rates remain elevated, consumers are adopting a more cautious stance toward their disposable income, which is echoed in the sales report.
Although U.S. consumer confidence has been increasing in recent times (as Americans grew more upbeat about the economy and the job market amid more optimistic views about inflation), consumers were less optimistic about the short-term business conditions outlook. Notably, per the latest January Commerce Department's Census Bureau report, 16.6% of consumers expect short-term business conditions to improve, down from 18.7% in December 2023.
Stiff Competition: The home furnishing 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.
Strong Digital Platform, Product Reinvention & Marketing Moves: The optimization of the supply chain and an improvement in e-commerce channels are expected to drive the top line. E-commerce will continue to play a major role as people find it more comfortable and safer to shop online. Product innovation plays a pivotal role in market share gain in this industry. Companies aim to come up with products and collaborate with celebrated brands and designers to maintain exclusivity. Also, customer experience is being enhanced by innovative marketing techniques, with an 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 six-stock group within the broader Zacks Retail-Wholesale sector. The industry currently carries a Zacks Industry Rank #206, which places it in the bottom 18% 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 lower 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 October 2023, the industry’s earnings estimates for 2024 have decreased to $5.64 per share from $5.90.
Despite the industry’s blurred 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 Outperforms the Sector & S&P 500
The Zacks Retail-Home Furnishings industry has outperformed the broader Zacks Retail-Wholesale sector and the Zacks S&P 500 Composite over the past year.
The industry has risen 24.8% compared with the broader sector’s 21.3% growth. The Zacks S&P 500 composite has gained 20.7% 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 13.4 compared with the S&P 500’s 20.6 and the sector’s 22.9.
Over the last five years, the industry has traded as high as 19.4X and as low as 7.1X, with the median being 13.4X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
2 Retail-Home Furnishings Stocks to Watch
We have highlighted two stocks from the industry that are capitalizing on fundamental strengths and have solid growth prospects. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Tempur Sealy International: Headquartered in Lexington, KY, this company is involved in the development, manufacturing and marketing of bedding products. Its omni-channel distribution strategy’s success has been boosting Tempur’s presence. Despite challenging macro conditions, the company has been investing in industry-leading product innovation and advertising spend, expanding manufacturing capacity, driving omni-channel expansion worldwide, and working on a balanced capital allocation strategy. For 2024, the company’s brand, products, and omnichannel initiatives will likely drive growth.
The TPX stock has gained 19.9% over the past year. The company carries a Zacks Rank #2 (Buy) and has an expected earnings growth rate of 17.5% for 2024. Estimates for 2024 earnings have increased to $2.83 per share from $2.78 over the past 30 days. This company surpassed earnings estimates in three of the trailing four quarters, the average being 2.4%.
Price and Consensus: TPX
Fortune Brands Innovations: Based in Deerfield, IL, this company provides home and security products for residential home repair, remodeling, new construction and security applications in the United States and internationally. Amid the ongoing challenging economic conditions, the company has been focusing on an alteration in the cost structure, proficient production planning, protecting margins and improving cash generation. The company has rebranded its entire company, with a business focused on driving accelerated growth in categories through brand and innovation. It has reorganized the company from a decentralized structure with separate businesses to an aligned operating model that prioritizes activities that are key to brand, innovation and channel. These transformative changes will enable Fortune Brands Innovations to drive growth in the future.
The FBIN stock has risen 20.3% over the past year. This company, carrying a Zacks Rank #3 (Hold), surpassed earnings estimates in all the trailing four quarters, the average being 9.1%. Estimates for 2024 earnings have increased to $4.25 per share from $4.18 over the past 60 days. The estimated figure indicates 8.7% year-over-year growth. It also has a favorable VGM Score of A, making it a potentially interesting investment opportunity.
Price and Consensus: FBIN