Chicago, IL – October 23, 2024 – Today, Zacks Equity Research discusses SharkNinja, Inc. SN, Virco Mfg. Corp. VIRC and Flexsteel Industries, Inc. FLXS.
Link: https://www.zacks.com/commentary/2355180/3-furniture-stocks-worth-watching-amid-a-challenging-industry-landscape
Dwindling consumer confidence and economic uncertainty are marring prospects of the Zacks Furniture industry. Consumers' cautious spending and high interest rates have created hurdles, but companies like SharkNinja, Inc., Virco Mfg. Corp. and Flexsteel Industries, Inc. are capitalizing on this period by strategically investing 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.
The report was released shortly after the Federal Reserve cut interest rates by half a percentage point — the first cut in four years — due to a favorable inflation outlook and concerns about a weakening labor market.
Consumers are adopting a more cautious stance toward their disposable income and appearing to shift toward essentials, which is echoed in the sales report. Furniture and home furnishing store sales declined 0.7% in August 2024 compared to last year.
Meanwhile, the 30-year fixed-rate mortgage increased for the third consecutive week, moving closer to 6.5% for the week that ended Oct. 17, 2024. This could keep potential home buyers away from the market, thereby impacting the furniture industry which is dependent on the homebuilding market.
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, 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.
Innovation, Digital Marketing: Product innovation plays a decisive factor in 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. 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.
The Zacks Furniture industry is a nine-stock group within the broader Zacks Consumer Discretionary sector. The industry currently carries a Zacks Industry Rank #206, which places it in the bottom 17% 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 a 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 August 2024, the industry’s earnings estimates for 2024 and 2025 have decreased to $2.22 per share (from $2.24) and to $2.64 per share (from $2.66), respectively.
Although the industry's short-term outlook remains uncertain, we will highlight a few stocks that investors might consider adding to their portfolios. But first, let's review the industry's recent shareholder returns and current valuation.
The Zacks Furniture industry has outperformed the broader Zacks Consumer Discretionary sector and the Zacks S&P 500 Composite over the past year.
Over this period, the industry has gained 64.8% compared with the broader sector’s 20.4% rise. The Zacks S&P 500 Composite has gained 38.5% 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 16.24X compared with the S&P 500’s 22.27X and the sector’s 19.19X.
Over the past five years, the industry has traded as high as 16.6X and as low as 8.14X, with the median being 11.85X.
We have selected three stocks from the Zacks universe of furniture stocks that have impressive growth prospects.
SharkNinja: Headquartered in Needham, MA, this fast-growing product design and technology company is renowned for its Shark and Ninja household and lifestyle appliances, spanning 33 subcategories in 32 markets. The company has thrived by prioritizing continuous product innovation, launching new categories, and expanding internationally. Its growth strategy revolves around three key pillars — strengthening existing categories, exploring new ones, and pursuing global expansion.
This approach is set to drive substantial growth and create numerous opportunities. The company's four core focus areas include disruptive innovation, a globally agile supply chain, 360-degree always-on marketing, and omnichannel distribution.
SN — a Zacks Rank #2 (Buy) stock — has gained 165.5% over the past year. The Zacks Consensus Estimate for 2024 and 2025 earnings per share (EPS) indicates 31.1% and 13.7% year-over-year growth. This company surpassed earnings estimates in all the trailing four quarters, with the average surprise being 14.3%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Virco Mfg. Corporation: 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 #3 (Hold) stock — has gained 127% in the past year. Earnings estimates for fiscal 2024 have increased to $1.93 per share (from $1.86) over the past 60 days, depicting analysts’ optimism about the company’s prospects. The estimated figure indicates 44% 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 63.8%. It also carries an impressive VGM Score of B, making it a potentially interesting investment opportunity.
Flexsteel: Based in Dubuque, IA, Flexsteel operates as a manufacturer, importer, and markets of furniture for residential markets in the United States. Flexsteel has been gaining market share in its core markets and expanding into new areas through product development and innovation. The company has been effectively managing costs, leveraging higher sales and implementing supply chain cost-saving measures, resulting in improved margins and reduced SG&A expenses.
The company's efforts in product portfolio management and productivity enhancements led to continued improvement in operating margins, now at 5.8% for the fiscal first quarter of 2025. Despite industry-wide demand challenges due to macroeconomic factors, Flexsteel's aggressive strategy in product innovation and marketing has been helping it to sustain growth momentum.
FLXS — a Zacks Rank #3 stock — has gained 115.1% in the past year. The Zacks Consensus Estimate for fiscal 2025 and 2026 EPS indicates 42.2% and 19% year-over-year growth. FLXS earnings topped the consensus mark in three of the last four quarters, met on one occasion, with the average surprise being 12.7%.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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