Today, Zacks Equity Research discusses WillScot Mobile Mini Holdings Corp. WSC, La-Z-Boy Inc. LZB and Flexsteel Industries, Inc. FLXS.
The Zacks Furniture industry has been bearing the brunt of supply-chain disruptions, greater inflation, continued investments in e-commerce, macroeconomic and geopolitical uncertainty, and intense competition. However, increasing investments in technological advancements and solutions are expected to drive the industry’s growth.
Also, product innovation and accretive buyouts should favor the furniture industry in expanding its global reach. Importantly, efficient cost management should lend support to industry players like WillScot Mobile Mini Holdings Corp., La-Z-Boy Inc. and Flexsteel Industries, Inc.
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
Soft Demand: The dynamic macroeconomic and geopolitical environments have been putting pressure on end markets and thereby impacting the companies’ performance. Spending on home improvements and repairs is expected to be soft in the near term, given several macroeconomic challenges, such as slowing sales of existing homes and rising interest rates.
The slowdown in the homebuilding industry, retail sales of building materials, and renovation permits point to a soft environment for residential remodeling, which would impact the furniture industry players. The year 2023 is expected to be challenging due to continued economic uncertainty.
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 expect inflation to outpace income growth. This would be a risk to spending, which makes up two-thirds of the economy. The industry players are distressed by rising logistic expenses. The labor market has struggled with the limited availability of labor, which is driving labor costs.
Also, the furniture industry is highly competitive, with home furnishing retailers, department stores and antique dealers giving it 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 may 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.
Innovation, Digital Marketing & Acquisitions: Product innovation plays a 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.
Customer experience is being enhanced by innovative marketing techniques, emphasizing digital marketing, better merchandising, store remodeling and loyalty programs. Furthermore, the industry players are pursuing acquisitions to broaden their product portfolio and expand their geographic footprint as well as market share.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Furniture industry is a nine-stock group within the broader Zacks Consumer Discretionary sector. The industry currently carries a Zacks Industry Rank #180, which places it at the bottom 27% 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 outperforms 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 lower 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 December 2022, the industry’s earnings estimates for 2023 and 2024 have decreased 10.2% and 1.8%, respectively.
Despite the industry’s gloomy near-term view, we will present a few stocks that one may consider adding to the portfolio. Before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.
Industry Outperforms Sector, Lags S&P 500
The Zacks Furniture industry has outperformed the broader Zacks Consumer Discretionary sector but lagged the Zacks S&P 500 composite over the past year.
Over this period, the industry has lost 16.2% compared with the broader sector’s 23.9% decline and the S&P 500’s decrease of 14.3%.
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 14.8X compared with the S&P 500’s 17.6X and the sector’s 17.8X.
Over the past five years, the industry has traded as high as 19.3X and as low as 9.4X, with the median being 14.8X.
3 Furniture Stocks to Watch
We have selected one stock from the Zacks universe of furniture stocks that currently carries a Zacks Rank #1 (Strong Buy). We also have selected two stocks with a Zacks Rank #3 (Hold) having impressive growth prospects.
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 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. It remains focused on navigating the near-term volatile environment while strengthening business for the long term with the Century Vision strategy.
LZB’s shares have gained 23.8% in the past six months, against the industry’s 11.3% drop. Earnings of La-Z-Boy – a Zacks Rank #1 company – are expected to grow 15.8% in fiscal 2023. Earnings estimates for fiscal 2023 and 2024 have increased to $3.60 and $2.98 per share from $3.28 and $2.73 per share, respectively, over the past 30 days. This depicts analysts’ optimism about the company’ prospects.
Flexsteel Industries: Based in Dubuque, IA, Flexsteel is a manufacturer, importer and online marketer of upholstered furniture for residential and contract markets in the United States. Despite challenges like excess inventory at both retailers and manufacturers, margin pressures from competitive pricing and economic headwinds, the company is expected to benefit from its growth strategy and new product introductions. Notably, although many furniture manufacturers are scaling back investments and resources due to uncertain business conditions across the industry, FLXS is making prudent investments to support long-term strategic growth plans.
The FLXS stock has jumped 45.1% over the past six months and carries an impressive VGM Score of A. This helps to identify stocks with the most attractive value, growth and momentum. This company surpassed earnings estimates in three of the trailing four quarters but missed on one occasion, with the average surprise being 223.3%. Earnings of FLXS – a Zacks Rank #3 company – are expected to grow 56.3% in fiscal 2023 and 187% in fiscal 2024.
WillScot Mobile Mini Holdings: This Phoenix, AZ-based company provides modular space and portable storage solutions. The company is benefiting from continuous product innovation, increased value-added products (VAPs) penetration, solid segmental results and transformation of the legacy WillScot business into Mobile Mini’s SAP platform. Record order backlog, broad-based end-market strength and growth initiatives such as pricing, VAPs, cross-selling, and acquisitions have been driving growth.
WSC, a Zacks Rank #3 stock, has gained 11.3% over the past six months. The company has an expected earnings growth rate of 40% for 2023 and 23.7% for 2024. Earnings estimates for 2023 and 2024 have increased to $1.75 (from $1.65) and $2.17 (from $2.02) over the past 30 days. It carries an impressive VGM Score of B.
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