Home furnishing industry is poised to grow in the upcoming years. The Freedonia Group forecasts household furnishings demand to reach $34.9 billion in 2021. According to the report, improvements in the residential housing market and improvement in disposable personal income will boost sales.
Notably, demand for home furnishing products depends on the performance of the broader housing market. Housing starts hit their highest level in more than a year in January 2018, after the sector recovered from a decline in December due to poor weather. Building permits, which are a reliable indicator of future demand, also increased favorably. Overall, the monthly new residential construction report indicates that the industry is in fine fettle and has a strong year ahead. As such, demand for home furnishing products are expected to increase.
Limited supply of homes, higher mortgage rates, higher raw material costs owing to the recent imposition of tariffs and labor shortage continue to plague the housing industry. However, these factors have failed to mar the performance of industry, which has been one of the top performers for quite some time.
Also, the current employment scenario looks promising, evident from the February job growth data which marked the best in more than one-and-a-half years. U.S. employers added 313,000 jobs in February, after an upward revision of 239,000 in January and surpassing market expectations of 200,000 jobs. The hourly earnings rose 2.6% year over year in February.
Considering the higher disposable income, consumers are expected to increase their spending on non-essential products like home furnishing items.This is expected to increase revenues for companies like RH (RH - Free Report) , Williams-Sonoma Inc. (WSM - Free Report) , At Home Group Inc. (HOME - Free Report) and Haverty Furniture Companies, Inc. (HVT - Free Report) .
Meanwhile, furniture accounts for a major portion of the broader furnishing industry. According to a recent report by Research and Markets, the home furniture market in the United States is likely to witness a CAGR of 6.14% during the period 2017-2021.
Again, demand for outdoor furnishing has increased steadily, per a study by the American Home Furnishings Alliance. According to the research, consumers use their outdoor rooms for almost everything that they can do indoors. This further raises the demand for furnishing products.
Given this backdrop, let’s try to ascertain which of these two key home furnishing players — RH and Williams-Sonoma Inc. — is a better investment option. Since both the companies carry a Zacks Rank #2 (Buy), we need to delve deeper into factors beyond rank. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Williams-Sonoma’s market capitalization is $4.2 billion, while that of RH is just $2.1 billion. Considering business size, Williams-Sonoma is undoubtedly a winner and is better positioned over the long term, courtesy of its massive scale of operations. However, short-term industry headwinds are likely to affect the companies.
RH’s revenues increased 14% in the nine months ending October 2017. The upside can be attributed to higher outlet and warehouse sales on the back accelerated inventory optimization efforts. RH’s comparable brand revenues increased 7% in the said period. On the other hand, Williams-Sonoma’s revenues rose 3.1% in the nine months ending October 2017 and comparable brand revenues increased 2.1%. Moreover, sales for fiscal 2018 are expected to increase 6.6% for RH and 4.3% for Williams-Sonoma. It is evident that RH’s efforts to boost sales are way more effective than Williams-Sonoma’s.
Earnings History, ESP and Estimate Revisions
Williams-Sonoma is set to report fourth-quarter fiscal 2017 on Mar 14, while RH is expected to release the same on Mar 13. RH has a greater chance of beating estimates as the company has an Earnings ESP of +1.77%. Meanwhile, Williams-Sonoma’s ESP value is -0.16%.
Considering a more comprehensive earnings history, RH and Williams-Sonoma have delivered positive surprises in three of the trailing four quarters. However, RH has a superior average earnings surprise of 17% compared with Williams-Sonoma’s figure of just 3.2%.
While comparing the earnings estimates over the last 60 days, RH’s estimate for fiscal 2018 has increased 2.9%, whereas that of Williams-Sonoma rose 5.4%. This indicates that analysts’ are getting more optimistic about Williams-Sonoma’s performance. However, RH’s earnings are expected to grow a whopping 82.7% in fiscal 2018 compared with Williams-Sonoma’s improvement of 15.1%.
RH’s shares have surged 127.9% in the past year, which is higher than the broader industry’s 7.5% rally. Meanwhile, Williams-Sonoma’s shares have returned 9.6%, which is lower than RH’s and the broader industry’s performance.
RH’s valuation looks stretched when compared with the industry average. Looking at the company’s price-to-earnings (P/E) ratio, the company is currently trading at 31.6, higher than the industry’s average of 16.1. Williams-Sonoma, with a Zacks Value Score of A, has a slightly lower P/E (14.8x), implying that there’s more upside left for the stock.
Return on Equity
Williams-Sonoma boasts a ROE of 25.5%, while the same for RH is 20%, more than the industry’s average of 10.1%. Clearly, Williams-Sonoma is more efficient in using shareholders’ funds than RH or other industry peers.
Our comparative analysis shows that RH has an edge over Williams-Sonoma when considering future earnings growth, price and sales performance. However, Williams-Sonoma’s large scale of operation, good return on earnings and attractive valuation cannot be ignored.
In conclusion, one has to consider that RH’s efforts to redesign supply chain network and rationalize product offerings have proved to be highly effective in driving sales. Also, RH has outperformed earnings estimates by a higher percentage and is expected to register strong earnings growth in fiscal 2018. This is why it may be a good idea to bet on RH over Williams-Sonoma.
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