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Home Furnishing Outlook Bright on Solid Housing Market
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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, bath ware, accent rugs, artificial floral products, and child and teen furnishing. The industry players also develop, manufacture, market and distribute bedding products.
Let’s take a look at the industry’s three major themes:
The industry is highly dependent on economic and U.S. housing market conditions. Home furnishing retailers are expected to benefit from improving housing market dynamics backed by a robust job market and the consequent rise in disposable income. Again, lower interest and mortgage rates could support housing and purchase activity. Yet, softness in the high-end U.S. housing segment is a pressing concern.
Product innovation plays a key decisive factor for market share gain in this industry. Companies aim at coming up with products and collaborating with celebrated brands and designers to maintain exclusivity. Also, customer experience is being enhanced by innovative marketing techniques, with emphasis on digital marketing, store remodeling and loyalty programs. Optimization of supply chain and improvement of e-commerce channels are also expected to drive the top line.
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 furnishing also pose a threat. Competitive product pricing has been eating into margins. Also, even though sales-building initiatives of the industry participants have been reaping results, these involve high costs. Increasing raw material and freight costs (including e-commerce shipping) and higher employment-related expenses could compress margins. Tariff-related woes owing to the U.S.-China trade spat are also likely to impact the industry in the near term.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Retail-Home Furnishings industry is a seven-stock group within the broader Zacks Retail-Wholesale sector. The industry currently carries a Zacks Industry Rank #105, which places it at the top 42% 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 bright prospects in the 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 positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. Since August 2019, the industry’s earnings estimates for 2019 and 2020 have been revised 35.2% and 12.9%, respectively, upward.
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.
Industry Outperforms S&P 500 and Sector
The Zacks Retail-Home Furnishings industry has outperformed both the broader Zacks Retail-Wholesale sector as well as the Zacks S&P 500 composite over the past year.
The industry has gained 17.1% compared with the S&P 500’s increase of 13.3% and the broader sector’s 11.2% growth over this period.
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 15.1X compared with the S&P 500’s 18.2X and the sector’s 24.8X.
Over the last five years, the industry has traded as high as 21.9X and as low as 12.5X, with the median being 16.5X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
Bottom Line
Expenses associated with continued investments in e-commerce, intense competition and rising freight and raw material costs might keep margins under pressure. Nonetheless, improving housing market fundamentals, efforts to redesign the supply chain network and rationalize product offerings, and investments in merchandising of brands and digital marketing are expected to drive the industry.
Currently, there are only three stocks with a Zacks Rank #2 (Buy) in the Zacks Retail-Home Furnishings industry that are cashing in on the solid industry fundamentals.
RH (RH - Free Report) : This Corte Madera, CA-based home furnishings retailer’s Zacks Consensus Estimate for its fiscal 2019 and 2020 earnings has gone up 0.3% and 0.4%, respectively, over the past 30 days. The company has an expected earnings growth rate of 14.7% for fiscal 2020.
Price and Consensus: RH
Tempur Sealy International, Inc. (TPX - Free Report) : Based in Lexington, KY, this company develops, manufactures, markets and distributes bedding products. The Zacks Consensus Estimate for its fiscal 2019 and 2020 earnings has gone up 8.3% and 3.2%, respectively, over the past 30 days. The company has an expected earnings growth rate of 46.3% for fiscal 2020.
Price and Consensus: TPX
The Lovesac Company (LOVE - Free Report) : This Stamford, CT-based home furnishing retailer has a three-five year expected EPS growth rate of 40%. The company has a trailing four-quarter positive earnings surprise of 7.7%, on average.
At Home Group Inc. : Headquartered in Plano, TX, this company operates home decor superstores in the United States. The company has an expected earnings growth rate of 13.2% for fiscal 2020.
Price and Consensus: HOME
Williams-Sonoma, Inc. (WSM - Free Report) : This is a San Francisco, CA-based multi-channel specialty retailer. The company has a trailing four-quarter positive earnings surprise of 8.1%, on average. The Zacks Consensus Estimate for its fiscal 2019 earnings has moved up 0.4% over the past 30 days.
Price and Consensus: WSM
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This outperformance has not just been a recent phenomenon. From 2000 – Q3 2019, while the S&P averaged +5.6% per year, our top strategies averaged up to +54.1% per year.
Image: Bigstock
Home Furnishing Outlook Bright on Solid Housing Market
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, bath ware, accent rugs, artificial floral products, and child and teen furnishing. The industry players also develop, manufacture, market and distribute bedding products.
Let’s take a look at the industry’s three major themes:
Zacks Industry Rank Indicates Bright Prospects
The Zacks Retail-Home Furnishings industry is a seven-stock group within the broader Zacks Retail-Wholesale sector. The industry currently carries a Zacks Industry Rank #105, which places it at the top 42% 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 bright prospects in the 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 positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. Since August 2019, the industry’s earnings estimates for 2019 and 2020 have been revised 35.2% and 12.9%, respectively, upward.
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.
Industry Outperforms S&P 500 and Sector
The Zacks Retail-Home Furnishings industry has outperformed both the broader Zacks Retail-Wholesale sector as well as the Zacks S&P 500 composite over the past year.
The industry has gained 17.1% compared with the S&P 500’s increase of 13.3% and the broader sector’s 11.2% growth over this period.
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 15.1X compared with the S&P 500’s 18.2X and the sector’s 24.8X.
Over the last five years, the industry has traded as high as 21.9X and as low as 12.5X, with the median being 16.5X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
Bottom Line
Expenses associated with continued investments in e-commerce, intense competition and rising freight and raw material costs might keep margins under pressure. Nonetheless, improving housing market fundamentals, efforts to redesign the supply chain network and rationalize product offerings, and investments in merchandising of brands and digital marketing are expected to drive the industry.
Currently, there are only three stocks with a Zacks Rank #2 (Buy) in the Zacks Retail-Home Furnishings industry that are cashing in on the solid industry fundamentals.
RH (RH - Free Report) : This Corte Madera, CA-based home furnishings retailer’s Zacks Consensus Estimate for its fiscal 2019 and 2020 earnings has gone up 0.3% and 0.4%, respectively, over the past 30 days. The company has an expected earnings growth rate of 14.7% for fiscal 2020.
Price and Consensus: RH
Tempur Sealy International, Inc. (TPX - Free Report) : Based in Lexington, KY, this company develops, manufactures, markets and distributes bedding products. The Zacks Consensus Estimate for its fiscal 2019 and 2020 earnings has gone up 8.3% and 3.2%, respectively, over the past 30 days. The company has an expected earnings growth rate of 46.3% for fiscal 2020.
Price and Consensus: TPX
The Lovesac Company (LOVE - Free Report) : This Stamford, CT-based home furnishing retailer has a three-five year expected EPS growth rate of 40%. The company has a trailing four-quarter positive earnings surprise of 7.7%, on average.
Price and Consensus: LOVE
Meanwhile, investors may hold on to the following 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 (Strong Buy) stocks here.
At Home Group Inc. : Headquartered in Plano, TX, this company operates home decor superstores in the United States. The company has an expected earnings growth rate of 13.2% for fiscal 2020.
Price and Consensus: HOME
Williams-Sonoma, Inc. (WSM - Free Report) : This is a San Francisco, CA-based multi-channel specialty retailer. The company has a trailing four-quarter positive earnings surprise of 8.1%, on average. The Zacks Consensus Estimate for its fiscal 2019 earnings has moved up 0.4% over the past 30 days.
Price and Consensus: WSM
Today's Best Stocks from Zacks
Would you like to see the updated picks from our best market-beating strategies? From 2017 through Q3 2019, while the S&P 500 gained +39.6%, five of our strategies returned +51.8%, +57.5%, +96.9%, +119.0%, and even +158.9%.
This outperformance has not just been a recent phenomenon. From 2000 – Q3 2019, while the S&P averaged +5.6% per year, our top strategies averaged up to +54.1% per year.
See their latest picks free >>