The points customers consider when buying quality furniture — product, price and style — could also apply when shopping for furniture company stocks.
It’s different for each buyer, but for the $100 billion U.S. home furnishing market, the efforts to dictate, sell and profit from couch selections have changed with online firms entering the fray. These young e-commerce businesses, such as Wayfair (ticker: W), often mimic the styles of the high-end brick-and-mortar stores, but sell at a discounted price. Traditional companies face an awkward choice: Fight the online businesses at their own game by reducing prices and cutting into margins or ignore them altogether.
Unlike other retailers, furniture is perfectly positioned to battle online encroachment by enabling shoppers to see the product before they buy.
And with a budding U.S. consumer over the past five years, these companies have certainly benefited. Recently, however, that trend has shown signs of weakening, and some of the companies, such as Restoration Hardware Holdings (RH), have lost gains made in the run-up. Here’s a look at how the high-end furniture makers are faring.
Restoration Hardware’s recent troubles have an upside. The company has had a rough go in 2016. The stock has dropped 50 percent this year, which quickened after the company released a preliminary earnings report in February that outlined expected sales of $647 million for the fourth quarter of 2015. Analysts expected $711 million in revenues.
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One cause of the sales miss, according to Restoration Hardware CEO Gary Friedman, was weak oil. Wealthy customers who work in the oil industry have been hurt by suppressed oil prices.
More concerning: Its efforts with promotions weren’t successful. While Friedman blamed the stock market, Morningstar analyst Jaime Katz is expressing doubts that wealthier “people are shortsighted” about the market in such a way that it would crush sales.
Instead, the softening may be because of the client Restoration Hardware tries to reach. It has to draw a fine line between promotions and discounts, which could harm the brand image.
To counter struggling promotional efforts, Restoration Hardware is planning a loyalty program in which a yearly membership leads to discounts on furniture. But it’s unclear if such a promotion would be effective, says Raymond James analyst Budd Bugatch.
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Instead, RH may be overreacting to a bad quarter. While same-store sales slowed, the company still grew 9 percent. Management continues to transform the company from being privately held and is increasing the number of stores — it plans to open five this year — while also improving online offerings.
Most encouraging for an investor, though, is that the recent ding in the price has made it a cheap company. With a price-to-earnings ratio of 16.7, it’s at a discount to the industry average of 30. Katz sees a target price of $65, which leaves it with a 67 percent upside.
Williams-Sonoma can capture customers throughout life. The owner of Pottery Barn and West Elm, Williams-Sonoma (WSM) was one of the first retailers — furniture or not — to understand and benefit from the potential of online sales. Now, online sales account for more than half of its overall revenues.
Pottery Barn, the largest by sales, has benefited from this and a connection with consumers over the look and quality of its products. However, this success has drawn copycats. And online is where you find many of those companies mirroring Pottery Barn’s products. “They’re not as high quality as Pottery Barn, but price is much lower,” says Wedbush analyst Seth Basham.
This could force Pottery Barn to reduce prices, which can hit margins. It may be cutting into sales as well, with Williams-Sonoma announcing that comparable store sales for Pottery Barn fell 2 percent in the fourth quarter of 2015.
That doesn’t mean WSM is shying away from online efforts. In fact, it’s using West Elm to ensure it can track and grow with consumers from a younger age. West Elm targets the millennial crowd with less expensive products. Williams-Sonoma can then capture the same customer as they earn more money and move to Pottery Barn, as well as connect with them as they get married and register at Williams-Sonoma, the kitchen-focused store.
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“The real difference is (other retailers) don’t have the same sort of ability to have repeat sales from their consumers the way Pottery Barn does,” Katz says.
But the price could pose a problem for a new Williams-Sonoma investor. Basham says it deserves some premium, but may have reached it at $58.
Ethan Allen tries to build new image. The smallest of the three companies, Ethan Allen Interiors (ETH), is also undergoing a transformation and updating its offerings to appeal to a slightly younger clientele. “It refreshed the product line,” Bugatch says. “It’s not what you would believe as your parent’s store.”
The company has developed a stable of interior designers, which can mix and match the right products to create a unique look for a customer’s home. It now has nearly 300 retail centers, which employ more than 2,000 interior designers.
Ethan Allen also rolled out new designs last year. Although revenues rose 1 percent, profits fell 13 percent due to costs associated with building the new product lines. The lack of growth, plus issues of CEO succession, led to a proxy fight where an activist investor tried to replace the board with new directors. While Sandell Asset Management’s efforts failed, it put the company on notice.
Meanwhile, there are signs the product revamps are starting to connect as second-quarter comparable design centers sales increased 7.3 percent, topping Bugatch’s expectation of 1.5 percent. But with a price tag of nearly $30, it may not offer much upside, even if the product looks more modern when you walk in the store.
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3 Furniture Companies Lounging in High-End Sales originally appeared on usnews.com
