Housing Upturn Helps Home Furnishing Retailer Stocks: a Surprising Winner

The boom in the housing market is creating ripple effects across the economy and the stock market, helping to propel shares of paint companies, hardware stores and others higher alongside the more predictable winners like homebuilders. While most of those companies benefit as homeowners or home purchasers focus on the structure of the buildings themselves, another category is seeing some gains as homeowners wary of the cost of major renovations turn instead to upgrading their curtains or furniture.

In recent months, the favored stock in the home furnishings sector has been Bed Bath & Beyond (BBBY), where shoppers can pick up anything from an air conditioner or a new set of pots and pans, to a few towels for a guest bathroom. And it is more efficient than many of its key rivals, including Williams-Sonoma (WSM), which has a similarly broad range of products via its Pottery Barn division, and Pier 1 Imports (PIR).

BBBY Operating Margin TTM Chart

BBBY Operating Margin TTM data by YCharts

But the company to watch here may not be Bed Bath & Beyond, but Pier 1. True, the company’s array of products is more limited than that of its larger rival, and there has been some recent selling by insiders. But if you glance at the most recent operating margin trends, above, you can see that those at Bed Bath & Beyond appear to be edging lower, while those at Pier 1 are on an upward trajectory.

Both companies noted that their sales suffered as a result of Hurricane Sandy, but in spite of that setback, Pier 1 reported a double-digit gain in revenues for its fiscal third quarter, ended November 24, and a 3% increase in profits. The company boosted its outlook for its profits for the full fiscal year to as much as $1.21 a share, up from a high end of the range of $1.16 a share previously.

PIR EPS Est Current Fiscal Year Chart

PIR EPS Est Current Fiscal Year data by YCharts

The company again raised its full-year earnings guidance, now expecting per-share earnings between $1.17 to $1.21 from its previous boosted view of $1.10 to $1.16. But in spite of reporting healthy gains in both profits and revenues for its own fiscal third quarter, Bed Bath & Beyond refrained from boosting its outlook for the full year, and its same-store sales growth of 1.7% was below its own 2% target and the 7.9% gain in same-store sales at Pier 1. Nor do the latter’s holiday same store sales show any signs of flagging, analysts have noted.

PIR Net Buyback Yield TTM Chart

PIR Net Buyback Yield TTM data by YCharts

There is the argument to be made that of the two retailers’ buyback strategies, that at Bed Bath and Beyond has generated a better outcome for investors, in terms of yield. Both firms have announced ongoing buyback programs for 2013, but Pier 1 went a step further by boosting its dividend payout to 25 cents a share. That dividend yield is still meager by market standards – just a notch below 1% -- but it’s more than the zero that Bed Bath & Beyond pays out, and offers investors a nice bonus atop those improving margins and robust same-store sales gains.

The wild card here is Restoration Hardware (RH), one of last year’s IPOs. The company caters to those with incomes of $200,000 or more, and thus isn’t likely to feel much competitive pressure from the likes of Target (TGT). (Although it should be noted that Pier 1 has done a good job altering its product mix to both boost margins and fend off challenges from discount-priced rivals.) Restoration Hardware reported its first quarterly results as a public company in December, announcing a 22% jump in profits and a 29% increase in same store sales although it, too, saw a small shrinkage in gross margins. Restoration, which had reported a loss in the year-earlier period, is clearly a company in this category to watch as it shifts its business strategy in favor of larger destination showrooms.

Suzanne McGee, a contributing editor at YCharts, spent nearly 14 years as a reporter at the Wall Street Journal, in Toronto, New York and London. She is also a columnist for The Fiscal Times, and author of "Chasing Goldman Sachs", named one of the best non-fiction books of 2010 by the Washington Post. She can be reached at editor@ycharts.com.

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