Chicago, IL – July 26, 2024 – Today, Zacks Equity Research discusses La-Z-Boy Inc. LZB, Virco Mfg. Corp. VIRC and Sleep Number Corp. SNBR.
Link: https://www.zacks.com/commentary/2309175/3-top-stocks-to-buy-from-the-promising-furniture-industry
Despite challenges like dwindling consumer confidence and economic uncertainty, the Zacks Furniture industry is poised for growth. Consumers' cautious spending and high interest rates have created hurdles, but companies like La-Z-Boy Inc., Virco Mfg. Corp. and Sleep Number Corp. are capitalizing on this period by making strategic investments in technological advancements, product innovation, and efficient cost management. These efforts, combined with accretive buyouts, are set to expand their global reach and strengthen their market positions. The industry is well-positioned to overcome current challenges and emerge stronger, driven by its commitment to innovation and operational efficiency.
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.
Customer experience is getting enhanced by innovative marketing techniques, emphasizing digital marketing, better merchandising, store remodeling and loyalty programs. These companies are utilizing advanced technology to enhance the overall customer experience, optimize their operations, and provide innovative solutions. Precisely, companies that make strategic investments in digital innovation are poised to navigate challenges successfully and emerge as industry leaders.
Acquisitions & Focus on Public Sector: The industry players are pursuing acquisitions to broaden their product portfolio and expand their geographic footprint as well as market share. Additionally, they are prioritizing the diversification of their business portfolios, expanding their global footprint, and strengthening their positions in resilient sectors such as healthcare and the public sector. The company and its peers are expected to benefit from strong global trends in infrastructure modernization.
High Rates & Dwindling Consumer Confidence: The furniture industry in the United States is feeling the pinch as consumer confidence hits a new low and interest rates remain at their highest level in over two decades. With the Federal Reserve holding rates steady between 5.25% and 5.5% since August 2023, the sector faces significant challenges.
Despite initial hopes for rate cuts, the Fed's recent decision to maintain current rates due to concerns about inflation has put further strain on consumers. This is echoed in the sales report. In June 2024, furniture and home furnishings sales were up only 0.6% month over month but decreased 4% from June 2023. It reflects a broader trend of consumer caution in the face of rising interest rates.
Consumer confidence, a key indicator of economic health, has also taken a hit. In June, the Conference Board reported that its consumer confidence index fell to 100.4, down from 101.3 in May. Worries about the labor market and income weighed heavily on consumers, leading to a more pessimistic outlook on short-term business conditions. This sentiment is further reflected in consumers' expectations for the future. According to the report, the percentage of consumers anticipating an improvement in business conditions decreased to 12.5% in June from 13.7% in May.
Higher Expenses: The industry players are engaged in active competition to enlarge their market share. In pursuit of this goal, industry players are intensifying their digital presence and refining shipping capabilities, leading to heightened investments. Also, the furniture industry is highly competitive, with home furnishing retailers, department stores and antique dealers having a hard time.
The companies need to make incremental investments to address an expanding omnichannel 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.
Alongside these challenges, the prospect of rising SG&A rates, increased labor and occupancy costs, and elevated expenses related to marketing and stores could place a strain on profit margins. Notably, the labor market has struggled with the limited availability of labor, which is pushing up labor costs.
The Zacks Furniture industry is a 19-stock group within the broader Zacks Consumer Discretionary sector. The industry currently carries a Zacks Industry Rank #76, which places it in the top 30% 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 bright 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.
Before we present a few stocks that you may want to consider for your portfolio, let's take a look at the industry's recent stock-market performance and valuation picture.
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 gained 16.5% compared with the broader sector's 1% rise. The Zacks S&P 500 Composite has gained 22.3% over this period.
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 14.1X compared with the S&P 500's 21.7X and the sector's 16.7X.
Over the past five years, the industry has traded as high as 19.4X and as low as 10X, with the median being 15X.
We have selected three stocks from the Zacks universe of furniture stocks that have 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. La-Z-Boy made significant strides in its Century Vision strategy over the past year, notably increasing the La-Z-Boy Furniture Galleries store network and the number of company-owned stores.
Additionally, LZB invested in its stores and manufacturing operations through remodels and enhancements to its supply chain agility. As a market leader in custom furniture known for comfort and quick delivery, LZB is well-positioned to outperform the industry and gain market share to leverage improved industry trends expected from interest rate cuts toward the end of fiscal 2025.
The company's strategy focuses on expanding its Retail segment, driving sales growth at double the industry rate, and enhancing margins. The new "Long Live the Lazy" brand campaign has been particularly effective in building awareness and driving purchase intent.
LZB — a Zacks Rank #1 (Strong Buy) stock — has gained 32.5% over the past year. Earnings estimates for fiscal 2025 and 2026 have increased to $3.13 (from $2.80) and $3.37 (from $2.95), respectively, over the past 60 days. The estimated figure indicates 5% year-over-year growth. This company surpassed earnings estimates in three of the trailing four quarters and missed on one occasion, with the average surprise being 15.3%. It also carries an impressive VGM Score of B, making it a potentially interesting investment opportunity. You can see the complete list of today's Zacks #1 Rank stocks here.
Virco Mfg. Corp.: Based in Torrance, CA, Virco manufactures, markets, and distributes a wide variety of school and office furniture. Their products cater to wholesalers, distributors, educational institutions, and governmental entities, positioning Virco as a key player in the educational and office furniture market. Virco has built exceptional brand awareness and a reputation for safety, reliability, and quality over its more than 74 years of serving the education market.
The company is well-positioned to benefit from the ongoing rationalization of extended supply chains. Economic barriers such as seasonality and the "price/cube threshold" protect Virco's existing market of school furniture and provide growth opportunities in adjacent markets. Virco's large installed base of furniture generates a substantial annuity-like revenue stream from follow-on orders. Additionally, the company's valuable U.S. manufacturing and distribution footprint, coupled with proven operating efficiencies, allows for significant production increases with minimal maintenance capital expenditures.
VIRC — a Zacks Rank #2 (Buy) stock — has gained 259.2% in the past year. Earnings estimates for fiscal 2024 have increased to $1.86 per share (from $1.60) over the past 60 days, depicting analysts' optimism about the company's prospects. The estimated figure indicates 38.8% year-over-year growth. VIRC earnings topped the consensus mark in three of the last four quarters, missed on one occasion, with the average surprise being 74.9%. It has a favorable VGM Score of A.
Sleep Number Corporation: Headquartered in Minneapolis, MN, this company provides sleep solutions and services in the United States. It has been reaping benefits from solid demand for smart beds. It has been accelerating strategic initiatives, strengthening competitive advantages, and creating meaningful value for customers, teams, business partners as well as shareholders.
SNBR — a Zacks Rank #2 stock — has lost 74.8% in the past year. SNBR earnings topped the consensus mark in three of the last four quarters, missed on one occasion, with the average surprise being 96%. It also has a favorable VGM Score of A.
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