Beyond Restoration Hardware: 3 Hot Home Furnishing Picks

Upscale furnishings retailer Restoration Hardware Holdings Inc. (NYSE:RH) reported better-than-expected earnings and sales in second-quarter 2016. This led to a 14.11% rally in the company’s stock price on Sep 8 in the after-hour trading session despite the session being a dull one for many consumer stocks.

After adjusting for one-time items, Restoration Hardware recorded 44 cents a share, crushing the consensus estimate of 29 cents. Sales increased 7% to $543.3 million from the year-ago level, better than the projected figure of $530 million.

Restoration Hardware's quarterly numbers lend us an insight into the several impediments the company is presently facing. Though the company’s retail locations reported a 15% rise in sales, its comparable-brand revenues dropped 3%. Direct revenues declined 2%, weighing on the company's growth.

The retailer thus forecasts third-quarter adjusted EPS between 13 cents and 18 cents, comparing unfavorably with analysts’ expectation of 43 cents. Meanwhile, sales are estimated at around $520–$530 million, below the analyst projection of $561 million.

Nevertheless, Restoration Hardware is making several strategic investments and changes to its business model that might lead to temporary weakness. However, the investments are likely to rake in higher revenues and earnings in 2017 and beyond.

The company expects to benefit from the launch of its redesigned Source Books this fall, the introduction of the RH Modern concept across the store network and a new investment in the RH Interior Design business. As the company primarily focuses on home furnishing, the demand for its products is related to performance of the broader housing construction market. Though the year started on a rather soft note, construction activity picked up pace in 2016.

Bright Spot

As per the latest data, new home sales raced close to a nine-year high in July, courtesy of cheap financing and increased hiring. Along with sales, homebuilding activities have stepped up, pointing to sustained buoyancy in the housing sector’s recovery. Low mortgage rates, steady job addition and a raise in wages collectively boosted sales of new homes.

We remind investors that the Zacks Industry Rank for home furnishing is in the top one-third of the list of 256-plus industries, putting it in the positive zone for now. Despite the volatile environment, the prospects of the home furnishing sector are brightening, courtesy of the ongoing recovery in the U.S. economy (to know more, please see: Zacks Industry Rank).

In view of the encouraging trend, it will be prudent to invest in fundamentally sound home furnishing stocks from the housing sector.

Our Choices

We have selected three home furnishing stocks that sport a Zacks Rank #1 (Strong Buy) or 2 (Buy). A Zacks Rank indicating “Strong Buy” or even “Buy” translates into an upward trend in the stock’s earnings estimates.

Tempur Sealy International Inc. (NYSE:TPX)

This manufacturer and distributor of bedding products has seen the Zacks Consensus Estimate for its current year earnings climb 8% over the last 60 days. Tempur Sealy’s estimated growth for the current year is 31.2%. Its 3-5 year EPS growth rate is pegged at 16.75%. The stock sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Fortune Brands Home & Security, Inc. (NYSE:FBHS)

The company provides home and security products in the U.S. and has witnessed a 6.6% rise in the Zacks Consensus Estimate for its current year earnings over the last 60 days. Fortune Brands Home & Security’s estimated growth for the current year is 32.1%. The company carries a Zacks Rank #2 and its long-term EPS growth rate looks impressive at 17.5%.

Haverty Furniture Companies Inc. (NYSE:HVT)

The company is a full-service home furnishings retailer. The stock has seen the Zacks Consensus Estimate for its current year earnings move north by 4.9% over the last 60 days. Haverty Furniture Companies’ estimated growth for the current year is 4.5% and it carries a Zacks Rank #2.

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TEMPUR SEALY (TPX): Free Stock Analysis Report

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RESTORATION HDW (RH): Free Stock Analysis Report

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