Home Furnishing Industry Outlook: Margin Woes to Linger

The Zacks Retail-Home Furnishings industry comprises retailers offering home furnishing products in 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 sensitive to the strength of the economy. A slowing housing market in the United States has stirred up concerns for home furnishings retailers. However, the companies are expected to benefit from a robust job market, and the consequent rise in disposable income and increasing consumer confidence.
   
• Product innovation plays a significant role in competing for market share in this industry. Companies tirelessly aim at bringing out new products and collaborating with celebrated brands and designers to maintain exclusivity. Also, customer experience is being enhanced through 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 top-line growth.
   
• 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 give stiff competition. Competitive product pricing has been leading to lower 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.

Zacks Industry Rank Indicates Dull Prospects

The Zacks Retail-Home Furnishings industry is an eight-stock group within the broader Zacks Retail-Wholesale sector. The industry currently carries a Zacks Industry Rank #166, which places it at the bottom 35% 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 a dismal 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.

Despite the industry’s gloomy near-term view, we will present a few home furnishing 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 Outperforms S&P 500 and Sector

The Zacks Retail-Home Furnishings industry has outperformed the broader Zacks Retail-Wholesale Sector as well as the Zacks S&P 500 composite over the past year.

The industry has gained 8.9% compared with the S&P 500’s increase of 2.3% and the broader sector’s 1.2% 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 10.2X compared with the S&P 500’s 16.7X and the sector’s 23X.

Over the last five years, the industry has traded as high as 21.9X and as low as 10.4X, 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

Efforts to redesign the supply chain network, rationalize product offerings, and invest in merchandising of brands and digital marketing are expected to drive the industry’s growth. However, costs associated with continued investments in e-commerce, intense competition and rising freight and raw material costs might keep margins under pressure.

Currently, there are only two top-ranked stocks in the Zacks Retail-Home Furnishings industry that are cashing in on the positive industry fundamentals.

RH (RH): This Corte Madera, CA-based home furnishings retailer carries a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for earnings for fiscal 2019 has gone up 0.2% over the past 60 days.
 
Price and Consensus: RH

 
 

Haverty Furniture Companies, Inc. (HVT): Based in Atlanta, GA, this company operates as a specialty retailer of residential furniture and accessories in the United States. This stock carries a Zacks Rank #2 (Buy) and the Zacks Consensus Estimate for earnings for 2019 has gone up 0.8% over the past 60 days.

Price and Consensus: HVT