Will 2014 Be a Good Year for Home Improvement and Home Goods Stocks?

Home Depot, Pier 1 Imports, and Bed Bath & Beyond had a good year in 2013 as the housing market started to recover.

Jan 9, 2014 at 7:00AM

Home-improvement retailers and home-goods chains had a good year in 2013 as the housing market started to recover. And continued growth for these outfits depends on the next phase of the long overdue housing market's return to normalcy.

Home Depot is still the leader of home-improvement retailers
Home Depot (NYSE:HD) had a very good year in 2013. The company's share price rose by about 40%. In its third-quarter report, released last November, the company announced sales of $19.5 billion -- a 7.4% percent increase from the third quarter of fiscal 2012. Net earnings came in at $1.4 billion, or $0.95 per diluted share, compared with net earnings of $947 million, or $0.63 per diluted share, in the same period of the prior year.

Home Depot also raised its fiscal 2013 sales guidance and anticipated sales to grow by about 5.6%. Finally, the company also expected diluted earnings per share to be up by 24% to $3.72 for the year.

Currently, the stock is hovering at about $82 per share. Its price-to-earnings ratio presently sits at 22.2, but the forward P/E ratio is 18.5. So investors might consider taking some money off the table in the near term.

Home-improvement sector depends on sustained housing-market recovery
The home-improvement retail sector's year was buoyed by a stronger housing market in the first half of 2013. And a sustained market recovery will be needed in 2014 to drive sales and earnings. But Home Depot is still strong in a number of ways. The home-improvement retail chain is the leader in this sector and the company has a solid track record of earnings-per-share growth. This is mostly because of consistent revenue growth over time.

In short, it is uncertain how much higher the share price of Home Depot can climb in the coming year. However, the company has a solid foundation for future growth, which means the company is still a good play for investors with a long-term view. In the meantime, there are alternatives to consider, particularly in the home-goods sector.

What looks good in the home-goods sector?
The home-goods sector features companies that make and distribute home furnishings, accessories, or "soft furnishings" like draperies and curtains.

One of the leading home-goods retailers is Bed Bath & Beyond (NASDAQ:BBBY). The company runs more than 1,000 stores under its brand name as well as other brands like Buy Buy Baby and Harmon Face Value. Together they appeal to consumers looking for small kitchen appliances, pots, pans, and other goods for the bedroom like sheets, blankets, and pillows.

In 2013, Bed Bath & Beyond's share price climbed more than 35%. In its last financial report, the company announced 3.4% growth in same-store sales and overall sales growth of 18% year over year. And it anticipates sales to rise by about 7% in 2014.

Shares are presently trading at about $80, slightly off the 52-week high. If the company's sales forecast for 2014 hits the anticipated targets, there will be some more profits to be found. That said, investors may also want to take a closer look at one of Bed Bath and Beyond's rivals, like Pier 1 Imports (NYSE:PIR).

This home-goods store is looking for a comeback year. The chain surprised a number of analysts last fall when it reported that second-quarter earnings fell by 32%. Pier 1 attributed this decline to weakening margins and falling foot traffic. And its shares were punished.

But the company was able to bounce back. In its third-quarter report, Pier 1 announced that total sales increased 9.6%, slightly off an increase of 10.9% in the same period the previous year. Furthermore, earnings per share increased to $0.26 compared to $0.22 for the same period in fiscal 2013.

In the new year, long-term investors need to consider whether the second-quarter setback was temporary and the extent to which the stock was oversold at that time. Future growth will be determined by how successful Pier 1 will be in focusing on Web marketing and Internet sales.

Final Foolish thoughts
While Home Depot, Bed Bath & Beyond, and Pier 1 are presently trading at a premium, a sustained housing-market recovery will boost sales in the coming year. So revenue and earnings should follow. In the final analysis, investors should consider home-improvement retailers and home-goods stores with a long-term view as the broader economy also continues its journey on the long road to recovery.

We're bullish about this stock in 2014
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Fool contributor Kyle Colona has no position in any stocks mentioned. The Motley Fool recommends Bed Bath & Beyond and Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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