The home goods sector's performance is a reflection of the bumpy housing market recovery. Investors should pick and choose their spots, but home furnishing retailers will perform better if and when a solid housing market recovery takes hold.
The housing market at a glance
The long anticipated housing market recovery has come in fits and starts for most of the last two years. Green shoots of optimism have been followed by cooling off periods. There are a number of factors at play here starting with the Federal Reserve's easy money policy.
Three rounds of quantitative easing were designed to prop up consumer and housing finance lending. But Federal Reserve Chairman Ben Bernanke noted in his recent press conference the 1% rise in mortgage interest rates during the summer cooled off the housing sector.
But the latest housing data shows an uptick. The Commerce Department announced sales of new single-family houses in August 2013 were at a seasonally adjusted annual rate of 421,000. This is 7.9% above the revised July rate of 390,000 and more than 12% above August 2012 sales of 374,000 units.
Since the housing market recovery has been hit or miss, investors should proceed with caution. But there are gains to be found in some of the home goods outlets.
Take a browse at these home goods stores
This sector includes shops which distribute home furniture and household accessories. One of the lead retailers here is Bed, Bath & Beyond (NASDAQ:BBBY).
Last week, the company reported earnings for its fiscal second quarter. Bed Bath & Beyond's sales grew nearly 9% to $2.82 billion. Same-store sales grew by 3.7%, while earnings per share were $1.16-18% higher than the same period in 2012 and a bit above the analyst consensus-$0.01.
The stock currently trades near its 52-week high, but a more solid housing recovery should help Bed Bath & Beyond to continue growing its brand in the long run. Moreover, the outfit's stock price has a predictable history of growth and this is a plus for investors.
Another place for investors to shop is Williams-Sonoma (NYSE:WSM)-one of Bed, Bath & Beyond's lead competitors. The home furnishing outlets focuses on living rooms and kitchen goods. Its exclusive products will continue to sell as the housing market recovery gets its sea legs.
In the third-quarter home furnishing sales were up 4.8% compared to the similar period in 2012, and 4.3% from the second quarter of 2013. These gains are due in part to Williams-Sonoma's exclusive products. Further, these products are being brought to the market more expediently as the company's new plant in North Carolina has ramped up production and delivery.
The stock is currently flirting with $56 per share, about $5 less than the 52 week high. Finally, the company's earnings per share in 2013 will benefit from the stock repurchases that began in March and continued through the summer.
Is Pier 1 a dry dock?
Home goods chain Pier 1 Imports (NYSE:PIR) surprised a number of analysts with its last financial report. Second-quarter earnings fell by 32% as weakening margins and falling foot traffic combined to push Pier1's shares down last week.
Moreover, the company revised its 2013 guidance. Previously the outfit anticipated full year earnings to come in at $1.27 to $1.32 per share. Pier expects earnings per share in the range of $1.23 to $1.29, however. The company attributes the poor sales figures to a flawed marketing strategy.
Now, the questions for long-term investors are whether this is a temporary setback and have traders oversold the stock. And that depends on how successful Pier 1 will be in shifting its focus to web marketing in a highly competitive global village.
The final clearance
In the long run, the next stage of the housing recovery will be a boon to homes goods sellers. These household furnishing shops are poised to cash in if and when the recovery takes hold. The housing market could take another dip in 2013 and consumers may retreat if the economy and job growth continues to be sluggish, however. So investors should proceed with caution.
Kyle Colona has no position in any stocks mentioned. The Motley Fool recommends Bed Bath & Beyond and Williams-Sonoma. 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.