It wasn't just technology stocks that took heavy hits in 2022. Share prices of top furniture companies also retreated rapidly, as worries grew about the economic downturn to come. Big-ticket furnishings are highly discretionary and tend to be quite sensitive to contractions in the economy.
Undoubtedly, the “looming” Fed-induced recession was a top fear for many investors through most of last year. Well, we just passed the midpoint of 2023, and there's still no recession yet. In fact, investors seem as confident as ever in the Fed's ability to avert a disastrous downturn.
In any case, the broader basket of furniture stocks has looked a bit more comfortable to own in recent months, thanks to their recent ricochet off lows. Even with fears of a recession still lingering, it certainly feels like the market is ready to move on, after doling out so much preemptive punishment to the discretionary retail plays over the past few years.
In this piece, we'll look at two furniture stocks that may offer deep value if the elusive recession never actually makes an appearance.
Restoration Hardware
Shares of high-end furnishing firm RH (RH) have been incredibly hot this summer, now up 58% since June 1.
After a solid first quarter (Q1 fiscal 2024), where adjusted earnings per share (EPS) of $2.21 topped estimates of $2.09, it's hard not to be hopeful for recovery. Bank of America Securities hiked its RH price target from $315 to $360, citing “improving demand trends.”
That said, the luxury spending pause may not be over. We've heard of the term “rich-cession” — a recession that hits wealthier individuals harder — quite a bit over the past few months. Regardless, secular tailwinds (e.g., the rise in millennial homeownership) are bound to retake control with time. With so much damage already done to the stock, the stage could be set for further recovery gains as evidence grows that the coming recession could prove shallow, at worst.
At the time of writing, shares of RH trade at 26.45 times trailing price-to-earnings (P/E), or 40.2 times forward P/E. Not a cheap stock, especially when you consider it trades at a hefty premium to the specialty retail industry average of 18.8 times.
Warren Buffett's Berkshire Hathaway (BRK.B) may have exited the name this year, but industry dynamics suggest it may be time to get back in before it becomes more apparent that the economic tides have turned.
Williams-Sonoma
Williams-Sonoma (WSM) stands out as one of the cheaper specialty retail companies in the market right now. At 8.9 times trailing P/E and 10.1 times forward P/E, the stock stands out as a stellar value play that can ride out a shallow recession. Though the Williams-Sonoma brand has come a long way in recent decades, it's still not a luxury brand that can stack up to the likes of an RH. Still, the company offers exposure to the mid-range and high-end of the discretionary retail waters. In essence, Williams-Sonoma seems to be more of a play on the state of the average American consumer.
Recently, Barclays downgraded the stock over its belief that Americans will spend less. If a recession occurs, and is just slightly deeper than shallow, WSM stock could have a lot of room to fall from here. For now, analysts seem split as to whether WSM stock is a great value play or a value trap.
Either way, there's no denying the stock's plunge, the bulk of which is now in the rearview mirror. Shares are still off 38% from their 2021 all-time highs. If the worst is already baked in, it may be smoother sledding to the upside as analysts act extra conservatively regarding quarterly expectations.
With a well-covered 2.73% dividend yield and considerable post-recession upside, I view WSM stock as more of a value play for those with a long-term investment horizon. My mildly bullish stance goes against the analyst crowd, though. If “improving demand trends” in luxury retail spread to the mid-to-high end, it could be Williams-Sonoma with the most to gain.
The Bottom Line
It's not easy to call a bottom in discretionary retail stocks. Shares of RH and WSM have experienced considerable relief in recent months, thanks in part to better-than-feared results and confidence that the Fed is winning the war against inflation. However, if the economy slows down, as many well-known investors believe, discretionary stocks will be hit hard.
For example, in an interview with MarketWatch yesterday, Interactive Brokers founder and billionaire, Thomas Peterffy, said, "I think the market should be much lower than where it is. I do think that it's going to go down pretty soon."
So I urge investors to be cautious when investing in consumer discretionary sector at this time. Companies in this sector produce nonessential goods, which are some of the first things people cut back on during challenging economic times.
On the date of publication, Joey Frenette did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
