Ethan Allen Interiors Inc.
The Lovesac Company
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, bathware, accent rugs, artificial floral products, and child and teen furnishing. The industry players also develop, manufacture, market and distribute bedding products. The companies provide home and security products for residential home repair, remodeling, new construction, and security applications. They are involved in manufacturing, assembling, and selling faucets, accessories, kitchen sinks, and waste disposal.
3 Trends Shaping the Future of the Retail-Home Furnishings Industry
Supply-Chain Issues, Stiff Competition & Labor Expenses: Industry players have been grappling with supply-chain bottlenecks. Due to supply issues across the world, these companies have been witnessing some inventory delays, product shortages and manufacturing delays. Accelerating raw material and freight costs (including e-commerce shipping) as well as higher employment-related expenses have been putting pressure on the companies’ margins.
Meanwhile, the home furnishings industry is highly competitive, with interior design trade and specialty stores, antique dealers, national and regional home furnishing retailers as well as department stores giving a hard time. Online retailers focused on home furnishing also pose a threat. Competitive product pricing has been eating into margins. Even though sales-building initiatives of the industry participants have been reaping positive results, these involve high costs.
Solid Residential & R&R Markets, Higher Consumer Spending: The industry, which is highly dependent on economic and U.S. housing market conditions, is expected to gain from the solid momentum in the U.S. housing market. The COVID-19 pandemic has encouraged consumers to take on more do-it-yourself or DIY and other home-improvement projects. So, the industry stands to benefit from a solid rise in repair and remodeling (R&R) activities.
Consumer spending levels are also likely to remain high, courtesy of the savings from the pandemic. This, accompanied with low household debt and a strong jobs market should continue to drive the economy in 2022 amid headwinds like rising prices.
Strong Digital Platform, Product Reinvention & Marketing Moves: Optimization of the supply chain and improvement in e-commerce channels are expected to drive the top line. In fact, e-commerce rescued the retail sector amid pandemic-induced uncertainties. This digital platform will continue to play a major role, as people find it more comfortable and safer to shop online. Product innovation plays a key role in market share gain in this industry. Companies aim to come up with products and collaborate with celebrated brands as well as designers to maintain exclusivity. Also, customer experience is being enhanced by innovative marketing techniques, with emphasis on digital marketing, better merchandising, store remodeling and loyalty programs.
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 #175, which places it at the bottom 31% 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 bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform 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 a dull 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 bottom-line growth potential. Since March 2022, the industry’s earnings estimates for 2022 have been revised 0.6% downward.
Despite the industry’s dim near-term view, we will present a few stocks that one may consider adding to their portfolio. Before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.
Industry Lags Sector, S&P 500
The Zacks Retail-Home Furnishings industry has underformed the broader Zacks Retail-Wholesale sector as well as the Zacks S&P 500 composite over the past year.
The industry has lost 34.3% compared with the S&P 500’s 2.7% decline. The broader sector has declined 29.3% over this period.
One-Year Price Performance
Industry’s Current Valuation
On the basis of the forward 12-month price-to-earnings ratio, which is commonly used for valuing retail home furnishing stocks, the industry is currently trading at 8.4 compared with the S&P 500’s 17.4 and the sector’s 20.4.
Over the last five years, the industry has traded as high as 20.7X and as low as 8.4X, with the median being 15.3X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
4 Retail-Home Furnishings Stocks to Watch Out For
We have selected two stocks from the Zacks retail home furnishing sector that currently sport a Zacks Rank #1 (Strong Buy) or 2 (Buy). We have also highlighted two other stocks carrying a Zacks Rank #3 (Hold) with solid prospects.
Lovesac: This Stamford, CT-based company retails home furnishing products like alternative furniture stores, sectionals, bean bags, bean bag chairs and other accessories. LOVE has been experiencing profitable growth across all sales channels given operational flexibility, highly-engaged customers, innovation and a proven omni-channel approach. For fiscal 2022, showroom sales grew 104.6% and and “Other” channel registered growth of 106.7%. Its recently launched Mobile Concierge service and unique business model with a concentrated SKU count and manufacturing spread across multiple geographies bode well.
LOVE currently flaunts a Zacks Rank #1 and has an expected earnings growth rate of 71.7% for fiscal 2023. Although its shares have declined 52.9% over the past year, LOVE has seen an upward estimate revision of 65.4% for fiscal 2023 earnings over the past 60 days. This depicts analysts’ optimism over the company’s prospects.
Price and Consensus: LOVE
Williams-Sonoma: This is a San Francisco, CA-based multi-channel specialty retailer. The company has been benefiting from a solid housing market, focus on digital initiatives, higher e-commerce penetration and product introductions. In addition to continued enhancement of the e-commerce channel, optimization of the supply chain and disciplined cost control are expected to drive growth.
Williams-Sonoma, a Zacks Rank #1 company, has declined 27.1% over the past year. That said, earnings estimates for the current year have moved 10% north over the past 30 days.
Price and Consensus: WSM
RH: Based in Corte Madera, CA, this leading luxury retailer in the home furnishing space has been riding high, given prudent growth initiatives, margin expansion efforts and stellar performance. Focus on elevating the brand and architecting an integrated operating platform has aided RH in becoming one of the few retailers with solid margins and operating earnings. It ended fiscal 2021 on a solid note, with adjusted operating margin expansion of 1,130 basis points (bps) from 2019, reflecting the strongest two-year growth in the sector. Adjusted net revenues grew 32% from fiscal 2020, marking one of the highest two-year growth rates in the industry.
RH currently holds a Zacks Rank #3 and has an expected earnings growth rate of 0.3% for fiscal 2022. Its shares have lost 55.4% over the past year. That said, RH has seen an upward estimate revision of 0.5% for fiscal 2022 earnings over the past 30 days.
Price and Consensus: RH
Ethan Allen Interiors Inc.: This Danbury, CT-based company operates as an interior design company and manufacturer and retailer of home furnishings. Its wide array of offerings, strong network of retail design centers, and focus on interior design services as well as technology enhancement have been benefiting the company.
Earnings of Ethan Allen, a Zacks Rank #3 company, are expected to grow 47.3% for fiscal 2022. It has slipped 15.9% over the past year. That said, ETD has seen an upward estimate revision of 6.4% for fiscal 2022 earnings over the past 30 days.
Price and Consensus: ETD
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