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 condition of the economy. As the coronavirus outbreak has resulted in a complete shutdown of business activities, disrupting global supply chains and international trade, the industry participants are expected to face the brunt on waning confidence and rising job losses. Moreover, the shift in consumers’ buying behavior toward more essential items rather than discretionary purchases added to the woes. The pandemic is likely to weaken sales in the months ahead that could support economists’ anticipation of a consumer-led recession by the second quarter. Additionally, the bleak near-term prospects of the housing market amid the virus-induced escalating economic uncertainties tarnish the furniture industry prospects.
- 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. 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. The U.S.-China trade war and volatility in lumber prices are the key causes for concern.
- Nonetheless, product innovation plays a key decisive factor for market share gain in this industry. Players are making investments in new products to improve 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 high.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Furniture industry is an seven-stock group within the broader Zacks Consumer Discretionary sector. The industry currently carries a Zacks Industry Rank #249, which places it at the bottom 2% 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 dismal 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 January 2020, the industry’s earnings estimates for 2020 and 2021 have been revised 40.2% and 28.3%, respectively, downward.
Despite the industry’s gloomy near-term view, we will present a few stocks that one can hold on to. Before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.
Industry Lags Sector and S&P 500
The Zacks Furniture industry has underperformed 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 35.5% compared with the S&P 500’s decline of 4.3% and the broader sector’s 19% decrease.
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 12.6X compared with the S&P 500’s 19.2X and the sector’s 20.7X.
Over the past five years, the industry has traded as high as 20.2X and as low as 8.7X, with the median being 15.4X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
Coronavirus-induced recession, rising unemployment claims along with low consumer spending are expected to dampen the prospects of the furniture industry. Additionally, the U.S. housing market slowdown owing to economic disruptions may hinder growth. Also, costs associated with continued investments, intense competition and trade-related woes might keep margins under pressure.
Currently, there is no top-ranked stock in the Zacks universe of furniture stocks that can stand tall despite the weak industry prospects. Nonetheless, investors may also hold on to the following stocks, which currently carry a Zacks Rank #3 (Hold) and have solid prospects. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Masonite International Corporation (DOOR - Free Report) : This Tampa, FL-based company is a designer and manufacturer of interior and exterior doors. The company’s trailing 12-month return on equity or ROE of 15.1% compares with the industry’s 3.4%.
Price and Consensus: DOOR
Bassett Furniture Industries, Incorporated (BSET - Free Report) : This Bassett, VA-based company manufactures, markets, and retails home furnishings in the United States and internationally. The company has a three-five year expected EPS growth rate of 16%.
Price and Consensus: BSET
WillScot Corporation (WSC - Free Report) : Headquartered in Baltimore, MD, this company provides various modular space and portable storage solutions in the United States, Canada and Mexico. The company has a three-five year expected EPS growth rate of 15%.
Price and Consensus: WSC
Below are two stocks with a bearish Zacks Rank that we would recommend investors to steer clear of for the time being.
Leggett & Platt, Incorporated (LEG - Free Report) : This Carthage, MO-based company designs and produces various engineered components and products worldwide. This Zacks Rank #5 (Strong Sell) company’s 2020 earnings per share are expected to decline 43.6%.
Price and Consensus: LEG
Sleep Number Corporation (SNBR - Free Report) : Headquartered in Minneapolis, MN, this Zacks Rank #5 stock provides sleep solutions and services in the United States. The company’s 2020 earnings per share are expected to decline 47%.
Price and Consensus: SNBR