4 top stocks to watch from the promising furniture industry – August 30, 2023

Higher interest rates, complications from the banking crisis and relatively low consumer confidence will continue to pose challenges for the Zacks furniture industry in the near term. Once again, continued investments in e-commerce and fierce competition are creating additional headwinds. Nevertheless, increasing investments in technological advancements and solutions are expected to drive the growth of the sector. Importantly, product innovation, along with positive buyouts, should benefit the furniture industry in increasing its global reach. These tailwinds aside, efficient cost management should support industry players WillScot Mobile Mini Holdings Corp. (WSC free report), MillerKnoll, Inc. (MLKN free report), La-Z-Boy Incorporated (LZB Free report), and American Woodmark Corporation (AMWD free report).

Industry description

The Zacks furniture industry includes manufacturers, designers and marketers of both residential and commercial furnishing solutions. Some companies supply kitchen and bathroom cabinets and various engineering components and products in the United States and international markets. A number of industry players also offer specialized rental services, such as modular and portable storage solutions, as well as modular space and portable storage solutions. They are involved in the design and production of a wide range of technical components and products for homes, offices and cars. The players in the sector focus on different sectors, namely construction, energy, healthcare, security, government, retail, trade, education and transportation.

4 trends shaping the future of the furniture industry

Innovation, digital marketing: Product innovation plays a decisive factor in increasing market share in this industry. Players invest in new products to improve product mix in a competitive landscape and drive revenue growth. In addition, 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 high. The customer experience is enhanced through innovative marketing techniques, with an emphasis on digital marketing, better merchandising, store renewal and loyalty programs. These companies use advanced technology to improve the overall customer experience, optimize their operations and provide innovative solutions. It is precisely companies that make strategic investments in digital innovation that are ready to successfully meet the challenges and grow into market leaders.

Acquisitions & Focus on the Public Sector: Industry players are pursuing acquisitions to broaden their product portfolio and expand their geographic footprint and market share. In addition, they prioritize diversifying their corporate portfolios, increasing their global footprint and strengthening their positions in resilient sectors such as healthcare and the public sector.

Challenging macroeconomic environment: The dynamic macroeconomic and geopolitical environments have put pressure on end-markets and thereby impacted corporate performance. Spending on home improvements and repairs is expected to be weak in the near term given several macroeconomic challenges, such as slowing existing home sales and rising interest rates. The slowdown in the housing sector, retail sales of building materials and renovation permits point to a weak home remodeling environment, which would affect players in the furniture industry. Moreover, the complications resulting from the banking crisis and the relatively low consumer confidence contribute to the headwind. However, 2023 is expected to be challenging due to the ongoing economic uncertainty.

Supply chain issues, rising inflation and higher costsThe companies have witnessed supply chain disruptions, especially in chemicals, semiconductors, labor and transportation, which are limiting volume growth. As such, consumers are increasingly concerned about rising inflation and many expect inflation to outpace income growth. This would put spending, which makes up two-thirds of the economy, at risk. The players in the sector are alarmed by the rising logistics costs. The labor market has struggled with the limited availability of labour, driving up labor costs.

In addition, the furniture industry is highly competitive, with home furnishing retailers, department stores and antique dealers struggling. Again, companies need to make additional investments to accommodate the growing omnichannel environment as consumers tend to look for online options. The growth in online sales may continue to erode the market share of traditional furniture retailers as brands such as Etsy, Things Remembered, Costco and Amazon make their way into the market.

Zack’s industry rank indicates good prospects

The Zacks Furniture Industry is a nine-stock group within the broader Zacks Consumer Discretionary sector. The industry currently holds a Zacks Industry Rank #105, placing it in the top 43% of over 250 Zacks industries.

The group’s Zacks Industry Rank, which is actually the average of the Zacks Rank of all member stocks, indicates good near-term prospects. Our research shows that the top 50% of industries ranked by Zacks outperform the bottom 50% by more than 2 to 1.

The industry’s positioning in the top 50% of industries ranked by Zacks is a result of higher earnings prospects for its constituent companies as a whole. Looking at the revisions to aggregate earnings estimates, it seems that analysts are gradually gaining confidence in this group’s earnings growth potential. Since June 2023, industry earnings estimates for 2023 and 2024 have increased by 3.7% and 2.2% respectively.

Before we present some of the stocks you may want to consider for your portfolio, let’s take a look at recent stock market performance and the industry’s valuation picture.

Industry lags sector, S&P 500

The Zacks furniture sector has underperformed the broader Zacks Consumer Discretionary sector and the Zacks S&P 500 composite over the past year.

During this period, the industry has lost 20.2%, versus the broader industry’s 5.5% gain and the S&P 500’s 12.1% gain.

One year price performance

Current valuation of the sector

Based on the 12-month price-to-earnings (P/E) ratio, commonly used to value furniture stocks, the industry is currently trading at 12.7x, compared to the 19.1x of the S&P 500 and the 17. 1x of the sector.

Over the past five years, the industry has traded as high as 19.4x and as low as 10x, with a median of 15.2x, as the chart below shows.

Industry P/E ratio (for the next 12 months) versus S&P 500

4 furniture stocks to watch

We’ve selected four stocks from the Zacks universe of furniture stocks that currently have a Zacks ranking of #2 (buy) or 3 (hold) and have impressive growth prospects. You can see the full list of current Zacks #1 Rank (Strong Buy) stocks can be found here.

American Woodmark: This Winchester, VA-based company is one of the largest manufacturers of kitchen and bathroom cabinets. Amid ongoing inflationary pressures and labor and logistics challenges, the company has witnessed strong sales growth in its new construction channel. A solid order book, higher investments in manufacturing capacity and capacity, workforce outsourcing and productivity improvements are expected to drive growth for US Woodmark.

AMWD — a Zacks Rank #2 stock — is up 52.2% so far, while the industry is down 16.5%. Earnings expectations for fiscal 2024 have risen from $6.53 in the last 30 days to $6.63 per share, reflecting analysts’ optimism about the company’s prospects. This company beat earnings expectations in three of the last four quarters, but missed once, with an average surprise of 26.8%. It also has an impressive VGM score of A. This helps identify stocks with the most attractive value, growth and momentum.

Price and Consensus: AMWD

MillerKnoll: Based in Zeeland, MI, this company researches, designs, manufactures and distributes interior furniture worldwide. MLKN has placed a strong emphasis on diversifying its portfolio of businesses, expanding its global presence and strengthening its position in robust industries such as healthcare and the public sector. The company uses advanced technology to improve the overall customer experience, streamline its operations and deliver advanced solutions. In addition, MLKN is deepening its partnerships with dealers to ensure flawless communication and optimize operational efficiency.

MLKN — a Zacks Rank #2 stock — lost 10.3% year-to-date. Earnings estimates for fiscal year 2024 and 2025 have risen over the past 60 days to $1.80 per share (from $1.71) and $2.53 per share (from $2.29), respectively. It also has an impressive VGM score of A.

Price and Consensus: MLKN

La-Z-Boy: Based in Monroe, MI, this company manufactures, markets, imports, exports, distributes and sells furniture products, accessories and casegoods furniture products. LZB has weathered challenges such as rising raw material and freight costs with the help of higher prices, a strong brand presence, extensive distribution across multiple channels, and strategic investments across the company to increase market share. It remains focused on navigating the volatile environment in the near term while strengthening the company for the long term with the Century Vision strategy.

LZB — a Zacks Rank #3 stock — is up 35% year to date. Earnings estimates for 2023 and 2024 have risen in the past seven days to $2.86 (from $2.80) and $3.05 (from $3.00), respectively. This company beat earnings expectations in all four subsequent quarters, with an average surprise of 27.1%. It also has an impressive VGM score of A.

Price and Consensus: LZB

WillScot Mobile Mini Holdings: This Phoenix, AZ-based company offers modular space and portable storage solutions. The company benefits from continued product innovation, increased penetration of value-added products (VAPs), solid segment performance and the transformation of the legacy WillScot business to Mobile Mini’s SAP platform. A record order backlog, broad end-market strength and growth initiatives such as pricing, VAPs, cross-selling and acquisitions have driven growth.

WSC — a Zacks Rank #3 stock — is down 8.9% so far and is outperforming the industry. Earnings estimates for 2023 and 2024 have jumped to $1.76 (from $1.75) and $2.32 (from $2.23) over the past 30 days. The company’s earnings exceeded the Zacks Consensus Estimate in all four subsequent quarters, averaging 11%. It has an impressive VGM score of B.

Price and Consensus: WSC

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