Home Furnishings: Investing Essentials

Find out what you need to know about investing in the home furnishings industry.

Aug 13, 2014 at 11:12AM

Rh Furniture
Home furnishings retail is an important business. Source: Restoration Hardware.

The housing industry plays a major role in driving the U.S. economy. Homebuilders provide new homes for homeowners, while building materials companies prepare the essential components of those new homes before they're built. An entire subsector of the finance industry deals with loans for home construction and mortgages for home purchases. And after homebuyers close on their purchases and move in, they typically need home furnishings, such as furniture, electronics, appliances, household gadgets, and other accessories in order to complete their house.

A host of home furnishings companies seek to meet the demand for the goods that help you make your house a home. Let's take a closer look at the home furnishings industry and its opportunities for investors.

What is the home furnishings industry?

The home furnishings industry most typically refers to companies that specialize in furniture and decorative accessories. From a broader perspective, department stores often have a wide range of furniture to complement their offerings of appliances and electronics, and several big-box electronics retailers have added appliances to cater to new homebuyers. But even though many homebuyers see television home-theater systems, refrigerators, and washer/dryer sets as essential purchases, those areas are treated as separate industry groups. That leaves home furnishings companies to focus on bedding, dining room tables and chairs, living room sets, and accessories ranging from lamps to gourmet coffee makers as their staples.

Different companies focus on various segments of the home furnishings industry. Companies like Bed Bath & Beyond and Williams-Sonoma offer one-stop shopping for a large selection of household items, although their furniture selections are often somewhat limited. By contrast, specialists like Ethan Allen Interiors focus on producing furniture sets throughout the home. On the bedding side, Tempur Sealy and Select Comfort make mattresses and related bedroom furniture sets, along with pillows and other accessories.

Tpx Bedding
Image source: Tempur Sealy.

How big is the home furnishings industry?

Home furnishings have a larger impact on the U.S. economy than you might expect. Nearly 450,000 employees in the U.S. work in the home furnishings industry, according to the latest figures from the Bureau of Labor Statistics, and almost half of them hold jobs as retail salespeople. In addition, the home furnishings industry employs managers to oversee salespeople as well as workers to stock shelves and transport goods from manufacturers to retail stores.

As you'd expect, the size of the home furnishings industry has risen and fallen with the prospects of the broader housing market. In the mid-2000s, furniture and home furnishings store revenue reached peak levels above $110 billion, according to figures from the U.S. Census Bureau. But the end of the housing boom led to a dramatic contraction in overall industry sales, and home furnishings revenue only climbed back above the $100 billion mark in 2013.

Statistic: Furniture and home furnishings store sales in the United States from 1992 to 2013 (in billion U.S. dollars) | Statista
Find more statistics at Statista.

How does the home furnishings industry work?

Like most retail businesses, the home furnishings industry involves manufacturers that make the products consumers want, as well as intermediaries to get those products into the hands of retail stores, and retailers that make the final sales to customers. Most of the major companies in the home furnishings sector are retail establishments, so they rely on homeowners and other consumer buyers to drive sales. Furniture manufacturers, on the other hand, have to cater to their direct retail customers in order to fulfill their function as suppliers, while also keeping in mind that they ultimately serve the consumers who buy their products.

Two things that distinguish parts of the home furnishings industry from other retail businesses, though, are the high ticket prices of furniture and other items as well as their large physical size. The logistical difficulties involved with those items and the financial challenge consumers face when considering purchases make the home furnishings industry a particularly competitive environment in many respects.

Wsm Bed
Source: Williams-Sonoma.

What drives the home furnishings industry?

The most important driver of home furnishings sales is the housing market. When people are moving in and out of new homes, they often take the opportunity to buy new home furnishings or upgrade their existing furniture and accessories, driving sales higher. During times of economic hardship, however, more people stay put in their existing homes, and they don't have the disposable income to finance major purchases of furniture and other high-ticket items.

The rise of Internet retail has also had a major impact on home furnishings. For smaller household goods like kitchen appliances, online retailers have posed a substantial competitive threat, undercutting home furnishings specialists and forcing them to establish their own e-commerce presence in order to counter attempts to take away their market share. For furniture and other bulky items, physical stores have more of an advantage against online retailers, but innovative retailers continue to look for ways to make even sales of larger items more efficient and logistically feasible. That could threaten the high margins some manufacturers currently enjoy on those items.

The home furnishings industry is inexorably linked to the level of housing activity in the market. Investors need to consider the current state of the housing cycle before investing in the sector, especially after periods of strong performance in housing, or else they risk taking a hit in the next cyclical downturn for the industry.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Bed Bath & Beyond and Williams-Sonoma. The Motley Fool owns shares of Tempur Sealy International. 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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