3 Home Furnishing Stocks to Buy Now - Analyst Blog

By Swarup Gupta,

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Following a significant increase in April, consumer credit increased once again in May. Automobile purchases made up the largest slice of consumer borrowing.

But revolving credit also increased, which indicates that an improving labor market and stock market gains have boosted consumer confidence. This has coincided with higher appliances and furniture sales, indicating an economic recovery.

Consumer Credit Rises

The Board of Governors of the Federal Reserve System reported yesterday that consumer credit increased by $19.6 billion in May, following a $26.1 billion increase in April. This increase in the indicator of potential future spending levels was more than the consensus estimate of an increase by $17.5 billion.

Consumer credit increased at a seasonally adjusted annual rate of 7.50%. Non-revolving credit increased at an annual rate of 9.25%. Revolving credit rose at an annual rate of 2.50%.

Home Sales Surge

The basis for the revival of home furnishings and building materials is the fact that housing data itself is on the positive side. Sales of new single-family houses increased 18.6% from April's revised rate of 425,000 to a seasonally adjusted annual rate of 504,000 in May. New home sales for the month of May increased to the highest level in six years.

Existing home sales rose 4.9% to a seasonally adjusted annual rate of 4.89 million in May from an upwardly-revised 4.66 million in April. This was also the fastest pace of increase in seven months.

The pending home sales index, a forward looking indicator based on contract signings, went up 6.1% to 103.9 in May. Further, May's 6.1% increase turned out to be the largest month-over-month gain since April 2010. It also touched the highest level in eight months.

The Silver Lining of Retail Sales

The U.S. Department of Commerce reported that seasonally adjusted sales of retail and food services rose 0.3% in March, less than the previous month's gains of 0.5%. This rise in retail sales in May was also less than the consensus estimate of an increase of 0.6%. Excluding motor vehicles sales, retail sales increased 0.1%, less than the consensus estimate of a 0.4% increase.

However, April's numbers were revised upward from the earlier reported increase of 0.1% to an impressive 0.5%. Taken together with these new numbers, May data looks much stronger.

Apart from auto sales, building materials were the only other bright spot for retail sales in May. Sales at stores like The Home Depot, Inc. ( HD ) and Lowe's Companies Inc. ( LOW ), which sell building materials, increased 1.1%. Such gains are usually witnessed in spring, when winter's chill recedes. Nearly, every other sector suffered reverses.

Another significant development was the spurt in sales at home-furnishing and furniture stores. Sales touched a seasonally adjusted figure of $8.55 billion in May. This is the highest monthly figure in six years. An increase in expenditure on carpets, couches and similar products supports upbeat home sales data.

This is also in keeping with the latest consumer credit numbers. It implies that consumers were willing to spend on more expensive items after reducing their credit card bills for several years. Such big-ticket items are often purchased on credit.

Additionally, last month, home furnishings major Restoration Hardware Holdings, Inc. ( RH ) reported spectacular first quarter fiscal 2014 results. The company's earnings of 18 cents per share grew threefold year over year.  The bottom line was driven by a robust 22% surge in the company's net revenues of $366.3 million.

Our Choices

Data on retail sales, consumer credit and the housing sector all indicate that the environment for home furnishing companies is quite conducive. Below we present three stocks which possess the potential to grow appreciably in this environment, each of which also has a good Zacks Rank.

Kirkland's Inc. ( KIRK ) is a leading specialty retailer of home décor products in the United States. The company sells framed art, mirrors, candles, lamps, picture frames, accent rugs, garden accessories and artificial floral products. The company's stores also offer holiday merchandise as well as throughout-the-year gifts.

The company operates through its stores under the names of Kirkland's, Kirkland's Home, Kirkland's Home Outlet, Kirkland's Outlet and The Kirkland Collection. The company also operates online through its website www.kirklands.com.

Kirkland's holds a Zacks Rank #2 (Buy) and has expected earnings growth of 22.40%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 17.73.

Tempur Sealy International Inc. ( TPX ) is involved in the development, manufacturing and marketing of bedding products primarily in North America and internationally. It provides mattresses, adjustable bases, pillows and other sleep and relaxation products.

The company's brand portfolio includes Tempur, Tempur-Pedic, Sealy, Sealy Posturepedic, Optimum and Stearns & Foster. Tempur Sealy International, Inc., formerly known as Tempur-Pedic International Inc., is headquartered in Lexington, Kentucky.

Currently the company holds a Zacks Rank #2 (Buy) and has expected earnings growth of 16.90%. It has a P/E (F1) of 21.53.

Williams-Sonoma Inc. ( WSM ) is aspecialty retailer of home products which uses multiple channels to reach its customers. The company sells its products through its own retail stores in the U.S., Canada and Puerto Rico

It also has franchisees in certain countries in the Middle East. The company also uses catalogs and the Internet to reach its customers. The retail segment sells its products using five merchandising concepts: Williams-Sonoma, Pottery Barn, Pottery Barn Kids, Rejuvenation and West Elm.

The direct-to-customer segment sells similar products utilizing seven merchandising concepts Williams-Sonoma, Pottery Barn, Pottery Barn Kids, PBteen, Rejuvenation, Mark and Graham and West Elm.

Apart from a Zacks Rank #2 (Buy), Williams-Sonoma has expected earnings growth of 13.30%. It has a P/E (F1) of 22.85.

With growth expected to pick up in the second quarter, consumers are expected to have more spending dollars at their disposal. Combined with positive news on the jobs front, this makes these three home furnishing stocks excellent options for your portfolio.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

HOME DEPOT (HD): Free Stock Analysis Report

LOWES COS (LOW): Free Stock Analysis Report

TEMPUR SEALY (TPX): Free Stock Analysis Report

KIRKLANDS INC (KIRK): Free Stock Analysis Report

RESTORATION HDW (RH): Free Stock Analysis Report

WILLIAMS-SONOMA (WSM): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Stocks: HD , LOW , TPX , KIRK , RH

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