The U.S. furniture industry is expected to see moderate growth through 2018 supported by rising consumer sentiment and discretionary spending. Broader economic recovery along with solid wages and employment opportunities no doubt bode well. According to Furniture Today, the furniture industry is expected to grow 3% to $111.4 billion in 2018 from $108.2 billion in 2017.
The strengthening millennial market is an added positive since it represents the largest consumer cohort in the furniture market. Millennials were the largest and most-active generation of homebuyers in 2017 for the fifth consecutive year, per the National Association of Realtors.
However, furniture retailers operate in a landscape that is changing from a generational point of view. The millennial approach toward home-buying is different from older generations. Added to these are housing affordability concerns in a rising interest rate environment.
In addition to a sluggish market, furniture companies need to continuously address a maturing omni-channel environment, as shoppers are more looking for online purchase. The growth in online sales will continue to fragment the traditional retailer market as brands such as Etsy, Things Remembered, Costco and Amazon are finding their way into the furniture market.
Higher raw material expenses and the pricing lag in case of commodity cost inflation are already affecting bottom line. Further, margins remained under pressure mainly due to commodity inflation and steel cost inflation.
Moreover, the threat of tariffs on imports and retaliatory tariffs on exports spell trouble for the industry. If tariffs are implemented, sourcing difficulty faced by home furnishing manufacturers will end up increasing costs.
Industry Lags on Shareholder Returns
Looking at shareholder returns over the past year, it appears that the strengthening economy and better job prospects weren't enough for enhancing investors' confidence in the industry's growth prospect.
The Zacks Furniture Industry , which is an eight-stock group within the broader Zacks Consumer Discretionary Sector , has underperformed both the S&P 500 and its own sector over the past year.
While the stocks in this industry have collectively lost 20.1%, the Zacks S&P 500 Composite and Zacks Consumer Discretionary Sector have rallied 12% and 10.9%, respectively.
One-Year Price Performance
Furniture Stocks Trading Cheap
Thanks to the underperformance of the industry over the past year, the valuation looks really cheap now. One might get a good sense of the industry's relative valuation by looking at its price-to-earnings ratio (P/E), which is the most appropriate multiple for valuing Consumer Discretionary stocks because their earnings are effective in gauging performance.
Generally, the price of a stock rallies on a rise in earnings. As forecasts for expected earnings move higher, demand for the stock should drive its price. If the P/E of a stock is rising steadily, it means that investors are pinning their hopes on the company's inherent strength.
This ratio essentially measures a stock's current market value relative to its earnings performance. Investors believe that the lower the P/E, the higher will be the value of the stock.
The industry currently has a trailing 12-month P/E ratio of 18.6, near the lowest level over the past year. When compared with the highest level of 21.2 and median level of 19.8 over that period, there is apparently plenty of upside left.
The space also looks quite cheap when compared with the market at large, as the trailing 12-month P/E ratio for the S&P 500 is 20 and the median level is 20.2.
Price-to-Earnings Ratio (TTM)
The chart below compares the industry's valuation picture with its sector. Such a comparison ensures that the group is trading at a decent discount. The Zacks Discretionary Sector's trailing 12-month P/E ratio of 27.3 and the median level of 25.2 for the same period are significantly above the Zacks Furniture Industry's respective ratios.
Price-to-Earnings Ratio (TTM)
Underperformance May Continue Due to Bleak Earnings Outlook
Expectations of increasing demand buoyed by robust economic fundamentals and solid wage growth build hope for the industry and in turn positive shareholder returns in the near future.
But what really matters to investors is whether this group has the potential to perform better than the broader market in the quarters ahead. Although the above ratio analysis shows that there is value-oriented path ahead, one should not really consider the current price levels as good entry points unless there are convincing reasons to predict a near-term rebound.
One reliable measure that can help investors understand the industry's prospects of a solid price performance is the earnings outlook for its member companies. Empirical research shows that a company's earnings outlook significantly influences the performance of its stock.
One could get a good sense of a company's earnings outlook by comparing the consensus earnings expectation for the current financial year with last year's reported number, but an effective measure could be the magnitude and direction of the recent change in earnings estimates.
While the consensus loss estimate for the Zacks Furniture industry of $2.06 per share implies a decent 25.6% year-over-year improvement, the trend in earnings estimate revisions has not been favorable lately.
Looking at the aggregate earnings estimate revisions, it appears that the loss estimate of $2.06 per share has widened from April 2018.
Current Fiscal Year EPS Estimate Revisions
Zacks Industry Rank Indicates Cloudy Prospects
The group's Zacks Industry Rank , which is basically the average of the Zacks Rank of all the member stocks, indicates continued outperformance in the near term.
The Zacks Furniture industry currently carries a Zacks Industry Rank #224, which places it at the bottom 13% of more than 250 Zacks industries. 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.
Now, looking at the past revenue performances, the prospect of the industry also looks bleak.
Solid economic recovery and a strong labor market with rising consumer spending should favor the performance of the furniture industry. Further, the Fed's upbeat economic outlook presents a solid scope for the consumer-driven furniture space.
Currently, there is only one stock that is cashing in on the positive economic fundamentals and is witnessing positive earnings estimate revisions with a bullish Zacks Rank.You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .
American Woodmark Corp. (AMWD): Headquartered in Winchester, VA, American Woodmark sports a Zacks Rank #1. The stock has, however, lost 5.5% over the past year.
Price and Consensus: AMWD
A slow market growth rate, commodity price inflation and looming tensions over a trade war could drag down the prospects of the furniture industry. Below are four stocks that carry a bearish Zacks Rank that we would recommend investors to stay away from for the time being.
Leggett & Platt, Inc. (LEG): Carthage, MO-based Leggett carries a Zacks Rank #4 (Sell). The stock has lost 14.9% over the past year. The consensus earnings per share estimate for the company has moved 3.6% lower for the current year, over the last 90 days.
Price and Consensus: LEG
WillScot Corp. (WSC): Baltimore, MD-based WillScot also carries a Zacks Rank #4. The stock has gained 7.7% over the past three months. The consensus earnings per share estimate for the company has moved 50% lower for the current year, over the last 90 days.
Price and Consensus: WSC
La-Z-Boy Inc. (LZB): Based in Monroe, MI, La-Z-Boy carries a Zacks Rank #5 (Strong Sell). The stock has lost 5% over the past year. The consensus earnings per share estimate for the current year has been revised 4.1% downward over the last 90 days.
Price and Consensus: LZB
Virco Mfg. Corp. (VIRC): Torrance, CA-based company carries a Zacks Rank #5. The stock has lost 17.7% over the past year. The consensus earnings per share estimate for the current year has been revised 7.7% downward over the last 90 days.
Price and Consensus: VIRC
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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 reportWillScot Corporation (WSC): Free Stock Analysis ReportVirco Manufacturing Corporation (VIRC): Free Stock Analysis ReportLa-Z-Boy Incorporated (LZB): Free Stock Analysis ReportLeggett & Platt, Incorporated (LEG): Free Stock Analysis ReportAmerican Woodmark Corporation (AMWD): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment Research