3 Furniture Stocks for Higher Returns Amid Supply-Chain Woes

WillScot Mobile Mini Holdings Corp.
La-Z-Boy Incorporated
American Woodmark Corporation

Industry Description

The Zacks Furniture industry comprises manufacturers, designers, and marketers of residential as well as commercial furnishing solutions. Some of the companies provide kitchen and bath cabinets as well as various engineered components and products in the United States along with international markets. A few industry players also offer specialty rental services such as modular and portable storage solutions as well as modular space and portable storage solutions. They are involved in designing and producing a wide variety of engineered components and products for homes, offices, and automobiles. The industry players cater to different sectors, namely, construction, energy, healthcare, security, government, retail, commercial, education and transportation.

3 Trends Shaping the Furniture Industry’s Future

Supply-Chain Issues, Rising Inflation & Higher Expenses: The companies have been witnessing supply chain disruptions, especially in chemicals, semiconductors, labor and transportation, which are constraining volume growth. As such, consumers are increasingly concerned about rising inflation and many of them expect inflation to outpace income growth. This would represent a risk to spending, which makes up two-thirds of the economy. The industry players are distressed by the rising raw material prices and logistic expenses. The labor market has also tightened with limited availability of labor, thereby driving labor costs.

Also, the furniture industry is highly competitive, with home furnishing retailers, department stores and antique dealers giving a hard time. Again, companies need to make incremental investments to address an expanding omni-channel environment, as shoppers tend to look for online options. Growth in online sales will continue to dent traditional furniture retailers’ market share as brands such as Etsy, Things Remembered, Costco and Amazon are finding their way into the market.

Positive Housing, & Residential & Repair & Remodeling Markets: Positive momentum in the housing market in the United States makes the near-term outlook of the furniture industry encouraging. With the rise in mortgage rates, the pressure on customers willing to buy homes has only increased. It is to be noted that the Federal Reserve expects to raise interest rates three times in 2022 as it exits from policies enacted at the start of the health crisis. The expectation of a rise in borrowing costs is driving sales in the housing market, which in turn should drive the demand for furniture products in the near term. Meanwhile, work from home or stay-at-home orders amid the COVID-19 pandemic have encouraged consumers to take on more home improvement projects. So, significant investments in renovation are expected to brighten the market outlook.

Innovation, Digital Marketing & Acquisitions: Product innovation plays a key decisive factor for market share gain in this industry. Players are investing in new products to improve the product mix in a competitive landscape and drive top-line growth. Also, millennials represent the largest consumer cohort in the furniture market. More money in the hands of this largest and most active generation of homebuyers should keep demand elevated. Also, customer experience is getting enhanced by innovative marketing techniques, with an emphasis on digital marketing, better merchandising, store remodeling and loyalty programs. Furthermore, the industry players are pursuing acquisitions to broaden their product portfolio and expand geographic footprint as well as market share.

Zacks Industry Rank Indicates Dull Prospects

The Zacks Furniture industry is a seven-stock group within the broader Zacks Consumer Discretionary sector. The industry currently carries a Zacks Industry Rank #240, which places it at the bottom 6% 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 tepid 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 negative 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 earnings growth potential. Since November 2021, the industry’s earnings estimates for 2022 have been revised 3.6% downward.

Despite the industry’s gloomy 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 Furniture industry has lagged the broader Zacks Consumer Discretionary sector and the Zacks S&P 500 composite over the past year.

Over this period, the industry has declined 0.5% against the S&P 500’s increase of 16% and the broader sector’s 8.7% growth.

One-Year Price Performance

Industry’s Current Valuation

On the basis of the forward 12-month price-to-earnings (P/E), which is commonly used for valuing furniture stocks, the industry is currently trading at 13.98X compared with the S&P 500’s 20.03X and the sector’s 13.16X.

Over the past five years, the industry has traded as high as 19.25X and as low as 9.40X, with the median being 15.28X, as the chart below shows.

Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500

3 Furniture Stocks to Watch Now

We have selected one stock from the Zacks universe of furniture stocks that currently carry a Zacks Rank #2 (Buy). We have also highlighted two other stocks carrying a Zacks Rank #3 (Hold) with solid prospects. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

WillScot Mobile Mini Holdings: This Phoenix, AZ-based company provides modular space and portable storage solutions. Higher core leasing revenues in the NA Modular segment, the addition of Mobile Mini’s revenues and higher deliveries of all four products across most of the end markets served by the company have been driving its performance. The company is benefiting from continuous product innovation, solid segmental results and transformation of the legacy WillScot business into Mobile Mini’s SAP platform. Meanwhile, the recently-acquired McDonald Modular Solutions added approximately 1,300 modular units and more than 300 storage units to the company’s existing markets in Michigan and Ohio.

WillScot, a Zacks Rank #2 stock, has gained 41.8% over the past year versus the industry’s 0.5% drop. The company has an expected earnings growth rate of 61.5% for 2022.

Price and Consensus: WSC

La-Z-Boy: Based in Monroe, MI, this company manufactures, markets, imports, exports, distributes, and retails upholstery furniture products, accessories, and casegoods furniture products. LZB has been benefiting from strong demand trends across all business units. Further, its solid cash position and investment in business bode well. The company has been navigating well through challenges like escalating commodity and freight costs with the help of higher pricing, strong brand presence, vast distribution through multiple channels and strategic investments across the business to drive market share gains.

La-Z-Boy’s shares have dropped 2.7% in the past year. Nonetheless, earnings of La-Z-Boy — a Zacks Rank #3 company — are expected to grow 43.5% in fiscal 2022.

Price and Consensus: LZB

American Woodmark: This Winchester, VA-based company is one of the largest manufacturers of kitchen and bath cabinets. Amid continued inflationary pressures, and labor and logistics challenges, the company has been witnessing strong sales growth in its new construction channel. A solid backlog level, higher investments in production capability and capacity, outsourcing staffing additions as well as productivity improvements are expected to drive growth for American Woodmark.

AMWD’s shares have dropped 32.9% in the past year. Although earnings of American Woodmark — a Zacks Rank #3 company — are expected to drop 40.2% in fiscal 2022, thanks to continued inflationary pressures outpacing the company’s pricing across all channels, the same for fiscal 2023 is likely to grow 76.7%.

Price and Consensus: AMWD

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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.