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Near-Term Outlook for Textile-Home Furnishing Looks Grim

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The Zacks Textile-Home Furnishing industry comprises manufacturers, designers, distributors and marketers of flooring, carpet and upholstery products. The products include carpets, rugs, ceramic tile, laminate, wood, stone and vinyl flooring in the United States and worldwide. Through a network of independently commissioned sales representatives, these industry players sell their products through independent distributors, retailers, wholesalers, specialty stores and home centers.

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

  • Though the housing market slowdown in the United States has made the operating backdrop a bit challenging for the industry players, the companies are registering higher demand courtesy of an increase in disposable income, lower unemployment rate and improving consumer confidence. Higher construction spending activity has turned out to be a boon for the Textile-Home Furnishing industry, boosting companies’ revenues and profits. Also, the recent decline in mortgage rates should benefit existing home sales, which in turn would provide a modest bump to repair and remodeling activity in the near term.
     
  • The industry participants have been drumming up sales with product innovation and expanded distribution in a highly competitive market. The companies are trying hard to offset higher costs by raising prices, expanding in growing channels, and foraying into new product categories and geographies. The companies are also pursuing accretive acquisitions to broaden their product portfolio and expand geographic footprint as well as market share.
     
  • On the flip side, rising raw material costs, higher transportation costs, a stronger dollar and a tight labor market are hurting profit margins. Significant investments in new products, distribution network and manufacturing facilities in a highly competitive landscape raise concerns. Moreover, the introduction of tariffs on $200 billion worth of Chinese imports by the Trump administration has the entire space reeling under trade-war fears. The threat of tariffs on imports and retaliatory tariffs on exports spell trouble for the industry. Higher tariffs make sourcing difficult for home furnishing manufacturers, pushing up costs.

Zacks Industry Rank Indicates Bearish Outlook

The Zacks Textile-Home Furnishing industry is a six-stock group within the broader Zacks Consumer Discretionary sector. The industry currently carries a Zacks Industry Rank #245, which places it in the bottom 4% 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 dull 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.

The industry’s positioning in the bottom 50% 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 Dec 31, 2018, the industry’s earnings estimate for the current year has gone down 11.3%.

Despite bleak near-term prospects of the industry, we will present a few home furnishing stocks that one can retain given their growth prospects. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.

Industry Lags Sector & S&P 500

The Zacks Textile-Home Furnishing industry has lagged the broader Zacks Consumer Discretionary sector as well as the Zacks S&P 500 composite over the past year.

The industry has declined 39.5% over this period compared with the broader sector’s decrease of 0.2%. The S&P 500 has risen 7.3% in the said time frame.

One-Year Price Performance


 
Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings ratio, which is a commonly used multiple for valuing these stocks, the industry is currently trading at 11.59X versus the S&P 500’s 17.05X and the sector’s 18.92X.

Over the past five years, the industry has traded as high as 19.41X, as low as 9.03X and at the median of 15.6X, as the chart below shows.

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

 

Bottom Line

A major boost in construction spending appears conducive to the industry’s growth. Also, efficient cost management along with continued focus on product innovation is expected to drive growth. However, the industry has been grappling with increased expenses. Margins remain stressed as raw material, transportation and labor costs continue to rise.

Currently, there is only one stock that is cashing in on the positive economic fundamentals and witnessing positive earnings estimate revisions. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Dunelm Group plc (DNLMY - Free Report) : Based in Syston, the United Kingdom, this company engages in the retail of homeware. The stock carries a Zacks Rank #2 (Buy) and has an expected earnings growth rate of 18.5% for 2019. Over the past seven days, the Zacks Consensus Estimate for 2019 EPS has risen 1.6%.

Meanwhile, investors may hold on to the following stock, which currently carries a Zacks Rank #3 (Hold).

Mohawk Industries, Inc. (MHK - Free Report) : This Calhoun, GA based company is a leading supplier of flooring for both residential and commercial applications. The stock has return on equity (ROE) of 11.4%, higher than the industry’s 7.9%.

Below are three stocks with a bearish Zacks Rank that we would recommend investors to stay away from for the time being.

Interface, Inc. (TILE - Free Report) : Headquartered in Atlanta, GA, Interface is the world's largest manufacturer of modular carpet with a Zacks Rank #4 (Sell). The consensus earnings per share estimate for the company has moved 0.6% lower for the current year, over the last 60 days.

Select Interior Concepts, Inc. (SIC - Free Report) : Headquartered in Anaheim, CA, this company installs and distributes interior building products for residential interior design services markets. The stock carries a Zacks Rank #5 (Strong Sell) and the Zacks Consensus Estimate for 2019 EPS has fallen 31.3%.

Culp, Inc. (CULP - Free Report) : Headquartered in High Point, NC, the company manufactures, sources, markets and sells mattress fabrics and upholstery fabrics. The stock carries a Zacks Rank #5 and the Zacks Consensus Estimate for 2019 EPS has fallen 19.4%.

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