A Housing Slowdown Means Investors Should Avoid Home Furnishings

Ethan Allen is up only 4% year to date, yet the S&P 500 is up an impressive 23%. This comes as the home furnishings manufacturer continues to see weakness due to a faltering economy, specifically in the weak housing market.

Ethan Allen's home furnishings demand remains heavily tied to the U.S. housing market. And the slowing of home renovations and home buildings is being exacerbated by the potential rise in interest rates and the extended elevation of high unemployment. 

This weakness is already coming through in earnings. Ethan recently posted 1Q EPS of $0.33, which beat the current consensus of $0.31. However, it is well below the previous consensus of $0.39 from just a couple months ago. The earnings results revealed continued weakness in sales and bookings. 

What's more is that continued weakness in Europe presents more headwinds for the company. While in the U.S., a slow growth economy means more customers will delay making large purchases, such as furniture. And for those customers that are buying furnishings, they've been trading down, which has further strained Ethan's margins. 

How Ethan stacks up
Another major issue is that Ethan must compete with the likes of Pier 1 Imports and La-Z-Boy . Pier was on the brink of bankruptcy back in 2009, but has come roaring back. It offers a range of home and outdoor furnishings.

One of the most notable furnishings competitors is La-Z-Boy, known for its recliners. The company has had an impressive run year to date, up some 65%. Meanwhile, Pier 1 hasn't had it that easy, with shares up only 5%. This comes as the company took a near 13% tumble last month after posting fiscal 2013 results. But the big news is that the company guided for 2014 EPS of $1.23 to $1.29, whereas previous analysts estimates were for $1.32. 

The other issue? Ethan Allen's days of inventory have soared to over the 161 days, while La-Z-Boy's is only 65 days. The other slight issue with Ethan is that margins are still well below historical levels, and they've shown no signs of rebounding. Ethan's operating margin is right at 8%, which is well below the 13% the company was churning out prior to the financial crisis. What's more, Ethan's return on equity is down to 9%, compared to the 20% the company was once generating. 

The numbers don't lie, Ethan Allen is having a rough time. Meanwhile, Pier 1's recent results also show some weakening in its markets. In addition, La-Z-Boy is highly exposed to the home furnishings market, and any weakness at Ethan is sure to be a weakness at La-Z-Boy. And both stocks are trading at valuations that don't warrant the risks. La-Z-Boy and Ethan trade at 25 times earnings, while the S&P 500 is at 19 times. What's more is that both of these home furnishings stocks have very high PEG ratios (anything below 1 is cheap). Ethan's PEG is 6, while La-Z-Boy's is 5. 

Bottom line
Ethan Allen is trying to break away from the furniture market, rebranding itself as a home furnishings company. No matter what it calls itself, it still has a lot of exposure to the housing market. And so, a slowdown in the housing market means a slowdown in Ethan Allen. And with analysts projecting very weak growth in earnings, this is one stock to avoid.

The article A Housing Slowdown Means Investors Should Avoid Home Furnishings originally appeared on Fool.com.

Marshall Hargrave has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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