The Zacks Furniture industry comprises manufacturers, designers and marketers of residential and commercial furnishings solutions. Some of the companies provide kitchen and bath cabinets as well as various engineered components and products in the United States and international markets. A few industry players also offer specialty rental services such as modular and portable storage solutions.
The industry players cater to different sectors namely, construction, energy, healthcare, security, government, retail, commercial, education and transportation.
Let’s take a look at the industry’s three major themes:
- The industry is highly sensitive to the strength of the economy. Although a slowing housing market in the United States poses a threat to the industry players, the companies are expected to benefit from a robust job market and the consequent rise in disposable income as well as increasing consumer spending.
- Millennials represents 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 high. Meanwhile, industry players are making investments in new products to improve product mix in a competitive landscape and drive top-line growth.
- However, the furniture industry is highly competitive with home furnishing retailers, department stores and antique dealers giving a hard time. Again, companies need to continuously address a deteriorating omni-channel environment as shoppers tend to look for online options. The growth in online sales will continue to dent traditional retailers’ market share as brands such as Etsy, Things Remembered, Costco and Amazon are finding their way into the furniture market. Meanwhile, furniture companies are also distressed by rising raw material and labor costs. Especially, volatility in lumber prices is a cause of concern.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Furniture industry is an eight-stock group within the broader Zacks Consumer Discretionary Sector.
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. The Zacks Furniture industry currently carries a Zacks Industry Rank #236, which places it in the bottom 7% of more than 250 Zacks industries. 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 bleak 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 February 2019, the industry’s earnings estimates for 2019 and 2020 have been revised 9.7% and 4.5%, respectively, downward.
Despite the discouraging scenario, we will present a few stocks that can be bought or retained, considering their robust growth endeavors. Prior to that, let’s take a look at the industry’s shareholder returns and current valuation.
Industry Lags Sector and S&P 500
The Zacks Furniture industry has lagged the broader Zacks Consumer Discretionary sector as well as the Zacks S&P 500 composite over the past year.
Over this period, the industry has lost 15.9% versus the broader sector’s and S&P 500’s decline of 4.1% and1.8%, respectively.
One-Year Price Performance
Industry’s Current Valuation
On the basis of forward 12-month price-to-earnings (P/E), which is commonly used for valuing furniture stocks, the industry is currently trading at 12.5X compared with the S&P 500’s 16.4X and the sector’s 17.7X.
Over the past five years, the industry has traded as high as 19.6X and as low as 10.7X, with the median being 15.1X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
Solid economic recovery and a strong labor market along with rising consumer spending should favor the performance of the furniture industry. However, a slowing housing market scenario in the United States, costs associated with continued investments, intense competition and rising raw material costs might keep margins under pressure.
None of the stocks in the Zacks Furniture space currently sports a Zacks Rank #1 (Strong Buy) or 2 (Buy). So, investors may hold on to the following two stocks, which currently carry a Zacks Rank #3 (Hold) and have solid earnings growth prospects. You can see the complete list of today’s Zacks #1 Rank stocks here.
Sleep Number Corporation (SNBR - Free Report) : Headquartered in Minneapolis, MN, this company, a Zacks Rank #3 (Hold) stock, provides sleep solutions and services in the United States. The Zacks Consensus Estimate for earnings for the current year indicates year-over-year growth of 33.9%. Estimates for 2019 have witnessed upward revisions of 4.5% in the past 30 days.
Price and Consensus: SNBR
American Woodmark Corporation (AMWD - Free Report) : Headquartered in Winchester, VA, this company, a Zacks Rank #3 stock, manufactures and distributes kitchen, bath and home organization products. The company has a three-five year expected EPS growth rate of 9%.
Price and Consensus: AMWD
Below are three stocks with a bearish Zacks Rank that we would recommend investors to stay away from for the time being.
La-Z-Boy Incorporated (LZB - Free Report) : This Monroe, MI-based company is one of the world's leading residential furniture producers. This Zacks Rank #4 (Sell) company’s earnings estimates for the current fiscal year have witnessed downward revision of 4.7% in the past 60 days.
Price and Consensus: LZB
Masonite International Corporation (DOOR - Free Report) : This Tampa, FL-based company is a designer and manufacturer of interior and exterior doors. This stock carries a Zacks Rank #4 and the consensus earnings per share estimate has moved 2% south for the current year, over the last 60 days.
Price and Consensus: DOOR
Bassett Furniture Industries, Incorporated : This Bassett, VA-based company manufactures, markets and retails home furnishings in the United States and internationally. This stock carries a Zacks Rank #4 and the consensus estimate for earnings per share has moved 39.5% south for the current year, over the last 60 days.
Price and Consensus: BSET