4 Retail Home Furniture Inventories to Watch Amid Industry Troubles

Weak demand conditions, given the slowdown in the real estate market, continued investments in e-commerce, supply chain bottlenecks and higher raw material costs in the home furniture market are taking precedence over efficient cost management and persistent focus on product innovation. While efforts are being made to redesign the supply chain network and rationalize product offerings, investments in brand merchandising and digital marketing could hurt a bit. However, Zacks retail furniture industry players such as Williams-Sonoma, Inc. WSM, Fortune Brands Home & Security, Inc. FBHS, Ethan Allen Interiors Inc. ETD and FGI Industries Ltd. FGI is looking to overcome the challenges.

Industry Description

Zacks’ retail furniture industry comprises retailers that offer home furniture products in various categories. The assortment of merchandise includes furniture, garden accessories, framed art, lighting, mirrors, candles, silverware, lamps, picture frames, bathroom fixtures, accent rugs, artificial floral products, and children’s and youth furniture. Industry players also develop, manufacture, market and distribute bedding products. The companies provide home and security products for home repairs, renovations, new construction and security applications. They are involved in the manufacture, assembly and sale of faucets, accessories, kitchen sinks and waste disposal.

3 trends shaping the future of the home retail furniture industry

Soft Demand: The industry has been suffering from an uncertain macro environment, continuing the slowdown in business trends as a result of continued weakness in the housing market and the series of interest rate hikes by the Federal Reserve. Higher mortgage rates are affecting the real estate industry as well as the furniture market.

Supply chain issues, fierce competition and labor expenses: Industry players have faced bottlenecks in the supply chain. Due to worldwide supply issues, these companies have witnessed some inventory delays, product shortages and manufacturing delays. Accelerating raw material and freight costs (including e-commerce freight), as well as higher employment-related expenses, are putting pressure on companies’ margins.

Meanwhile, the home furnishing industry is highly competitive, with interior design trade and specialty stores, antique dealers, national and regional home furniture retailers, as well as department stores giving difficulties. Online retailers focused on home furniture also pose a threat. Competitive product prices are consuming margins. While industry players’ sales-building initiatives are reaping positive results, they involve high costs.

Strong digital platform, product reinvention and marketing moves: Supply chain optimization and improvement in e-commerce channels are expected to boost revenue. Indeed, e-commerce has rescued the retail sector amid the uncertainties induced by the pandemic. This digital platform will continue to play an important role as people find shopping online more comfortable and safer. Product innovation plays a key role in gaining market share in this industry. The companies aim to create products and collaborate with famous brands and designers to maintain exclusivity. In addition, the customer experience is being enhanced by innovative marketing techniques, with an emphasis on digital marketing, better merchandising, store renovations and loyalty programs.

Zacks Industry Rank Indicates Dull Outlook

The Zacks Retail-Home Furnishings industry is a group of seven stocks within the broader Zacks Retail-Wholesale sector. The industry currently has a Zacks Industry Rank #194, which places it in the bottom 22% of over 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the members’ stocks, indicates bleak short-term prospects. Our research shows that the top 50% of industries ranked by Zacks outperform the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the bottom 50% of industries ranked by Zacks is a result of a dreary earnings outlook for the constituent companies as a whole. Looking at revisions to aggregate earnings estimates, it appears that analysts are gradually losing confidence in this group’s bottom line growth potential. Since May 2022, industry earnings estimates for 2022 have been revised down by 4.2%.

Despite the short-term view of the sector, we will present some stocks that can be considered in your portfolio. Before that, it’s worth taking a look at the sector’s shareholder returns and current valuation.

Industry Delays Sector, S&P 500

Zacks’ retail-home furniture sector underperformed the broader Zacks retail-wholesale sector as well as the composite Zacks S&P 500 last year.

The industry lost 31.8% compared to the S&P 500’s 8.8% decline. The broader sector is down 20.6% over this period.

One year price performance

Current industry assessment

Based on the 12-month price/earnings ratio, which is commonly used to value retail home furniture inventories, the industry is currently trading at 8.8 compared to the S&P 500’s 17.7 and the S&P 500’s 23.3. sector.

Over the past five years, the sector has traded up 19.4X and down 6.9X, with the median being 14.5X, as shown in the chart below.

Industry P/E Ratio (12 months ahead) vs S&P 500

4 Retail home furniture stocks to watch out for

We highlight four stocks currently with Zacks Rank #3 (Hold) and capitalizing on fundamental strengths. You can see the full list of today’s Zacks #1 Rank stocks here.

FGI Industries: Based in East Hanover, NJ, this company is a global supplier of kitchen and bath products. Continued strengthening in the Sanitary and Other categories, including shower systems and bespoke kitchen cabinets, has benefited the company. This trend has been strong in Canada, while the US and Europe have seen a modest increase. Strong revenue growth, supported by the company’s portfolio of innovative, high-quality products, has offset challenges such as supply chain disruptions, investments in organic growth initiatives and incremental costs from public companies.

FGI has an expected earnings growth rate of 4.8% for 2023. However, earnings for 2022 are expected to decline by 53.3% due to the aforementioned headwinds. Its shares lost 34.4% last year. That said, the FGI has seen a 10.5% upward estimate revision for 2022 earnings over the past 60 days. This portrays analysts’ optimism about the company’s prospects.

Price and consensus: FGI

Fortune Brands Home & Security: Based in Deerfield, IL, Fortune Brands specializes in designing, manufacturing and selling home and security products, primarily in kitchen and bathroom cabinetry, plumbing and fixtures, entryway systems and security product applications. The company’s strong fundamentals, including strength across all brands and innovation, transformation efforts, pricing actions and cost control measures, are expected to benefit it in the long run. Strong order volumes and high backlog levels are expected to continue to act as catalysts for the company’s growth.

FBHS has an expected earnings growth rate of 12% for 2022. Its shares lost 36.1% last year. That said, FBHS has seen an upward revision of the estimate of 0.2% for 2022 earnings and 1.4% for 2023 earnings over the past 30 days.

Price and Consensus: FBHS

Williams-Sonoma: This is a multi-channel specialty retailer based in San Francisco, CA. The company has benefited from its focus on digital initiatives, increased e-commerce penetration and product launches. In addition to the continuous improvement of the e-commerce channel, supply chain optimization and disciplined cost control are expected to drive growth.

Williams-Sonoma shares are down 22.2% last year. That said, earnings estimates for the current year have shifted 3.1% north over the past 30 days. The company has an expected earnings growth rate of 11.6% for fiscal 2022.

Price and consensus: WSM

Ethan Allen Interiors: This Danbury, CT based company operates as an interior design company and home furniture manufacturer and retailer. Its wide range of offerings, a strong network of retail design centers and focus on interior design services as well as technology enhancement have benefited the company. It recently reported solid results for the fourth quarter of fiscal 2022, showing the strength of its vertical integration, strong order backlog and increased production capacity. It remains well positioned for fiscal 2023 with its product offerings, vertical integration advantage including its North American manufacturing, retail network focused on interior design, a strong logistics network and a healthy balance sheet to maximize opportunities during the year.

ETD shares are down 10.3% last year, outperforming the industry. Profit estimates for fiscal 2023 have held steady at $2.95 per share for the past 60 days.

Price and consensus: ETD

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WilliamsSonoma, Inc. (WSM): Free Share Analysis Report

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