The raging inflation is making homeowners uncomfortable investing in home improvement projects. However, analysts see robust growth opportunities for the industry. We think fundamentally weak Floor & Decor (FND) might be best avoided this summer. However, it could be wise to hold quality home improvement stocks Acuity Brands (AYI), Tile Shop (TTSH), and Bassett Furniture (BSET). Let’s discuss this in detail….
Ahead of the Fed’s September rate hike, the latest report from The National Association of Realtors (NAR) revealed that sales of previously owned homes fell nearly 6% month-over-month and around 20% year-over-year in July.
Also, a survey showed that 60% of homeowners are less comfortable making large purchases for their homes due to the inflationary pressures, while nearly 43% agree that they have been delaying home improvement or maintenance projects because of the rising prices.
Given the backdrop, fundamentally weak home improvement stock Floor & Decor Holdings, Inc. (FND) might be best avoided now.
However, Lawrence Yun, chief economist at NAR, said, “Homeowners are still very comfortable financially.” According to Statista, home improvement sales in the U.S. amounted to $538 billion in 2021 and are expected to cross $600 billion by 2025.
Furthermore, the home improvement market is projected to grow at a CAGR of 4.6% from 2021 to 2028.
Given the growth prospects of the industry, quality home improvement stocks Acuity Brands, Inc. (AYI), Tile Shop Holdings, Inc. (TTSH), and Bassett Furniture Industries, Incorporated (BSET) seem poised for stable growth and could be wise additions to your portfolio.
Stock to Avoid:
Floor & Decor Holdings, Inc. (FND)
FND operates as a multi-channel specialty retailer and commercial flooring distributor of hard surface flooring and related accessories. The company operates around 166 warehouse-format stores and five design studios in 34 states.
FND’s net sales came in at $1.09 billion for the second quarter ended June 30, 2022, up 26.7% year-over-year. However, its net income decreased marginally year-over-year to $81.83 million. Also, its EPS decreased marginally year-over-year to $0.76.
FND’s forward EV/S of 2.51x is 113.7% higher than the industry average of 1.18x. Its forward P/S of 2.15x is 129% higher than the industry average of 0.94x.
The stock has lost 32.6% year-to-date to close the last trading session at $87.58.
FND has an overall D rating in our POWR Ratings system, equating to a Sell. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has a D grade for Value, Stability, and Sentiment. Click here for additional FND ratings (Growth, Momentum, and Quality). FND is ranked #53 out of 62 stocks in the Home Improvement & Goods industry.
Stocks to Buy:
Acuity Brands, Inc. (AYI)
AYI provides lighting and building management solutions in North America and internationally. The company operates through two segments, Acuity Brands Lighting and Lighting Controls (ABL); and the Intelligent Spaces Group (ISG).
On June 30, 2022, Neil Ashe, AYI’s Chairman, President, and CEO, said, “We are executing consistently as a result of significant and ongoing improvements in our business, and we continue to generate value for shareholders through share repurchases.”
Also, on January 12, 2022, AYI announced the expansion of its collaboration with Microsoft Corporation (MSFT) to enhance AYI brand’s smart lighting, lighting controls, and building automation solutions. This partnership should add solid value to AYI’s portfolio.
AYI’s net sales increased 17.9% year-over-year to $1.06 billion in the third quarter ended May 31, 2022. Its adjusted net income came in at $121.30 million, up 20.8% year-over-year, while its adjusted EPS came in at $3.52, up 27.1% year-over-year.
The stock’s forward EV/S of 1.54x is 7.4% lower than the industry average of 1.66x. Its forward EV/EBIT of 10.59x is 30.1% lower than the industry average of 15.15x.
In 2022, AYI’s revenue is expected to grow 15.2% year-over-year to $3.99 billion. Its EPS is estimated to increase 24% year-over-year to $12.61 in 2022. It surpassed the EPS estimates in each of the four trailing quarters. Over the past month, the stock has gained marginally to close the last trading session at $178.82.
AYI has an overall A rating, which equates to a Strong Buy in our proprietary rating system. In addition, it has an A grade for Quality and a B grade for Growth and Value. AYI is ranked #1 in the Home Improvement & Goods industry.
Click here to see the additional POWR Ratings for AYI (Momentum, Stability, and Sentiment).
Tile Shop Holdings, Inc. (TTSH)
TTSH operates as a specialty retailer of natural stone and man-made tiles, setting and maintenance materials, and related accessories in the United States. It operates around 143 stores in 31 states and the District of Columbia, the United States.
On August 4, 2022, Cabell Lolmaugh, CEO, said, “While we continue to navigate challenges presented by inflation and have seen our sales growth start to decelerate, we believe our strong balance sheet, improved in-stock levels, and exceptional team put us in a great position for long term success.”
TTSH’s net sales increased 11.9% year-over-year to $107.60 million for the second quarter ended June 30, 2022. Its net income came in at $6.91 million, up 25.8% year-over-year. The company’s EPS came in at $0.13, up 18.2% year-over-year.
In terms of forward EV/S, TTSH’s 0.82x is 29.9% lower than the industry average of 1.18x. Its forward P/S of 0.51x is 45.4% lower than the industry average of 0.94x.
In 2022, TTSH’s revenue is expected to increase 8.5% year-over-year to $402.28 million. Its EPS is expected to increase 20% per annum for the next five years. Over the past month, the stock has gained 21.9% to close the last trading session at $3.95.
TTSH has an overall B rating, which indicates a Buy in our proprietary rating system. The stock has an A grade for Sentiment and a B for Growth and Quality. Within the same industry, it is ranked #4.
Click here for the additional POWR Ratings for Value, Momentum, and Stability for TTSH.
Bassett Furniture Industries, Incorporated (BSET)
BSET manufactures, markets, and retails home furnishings in the United States and internationally. It operates through three segments: Wholesale; Retail company-owned Stores; and Logistical Services.
BSET’s net sales of furniture and accessories increased 17% year-over-year to $128.71 million for the second quarter ended May 28, 2022. Its net income came in at $47.12 million, up 688.7% year-over-year. Also, its EPS came in at $4.94, up 723.3% year-over-year.
BSET’s forward EV/S of 0.42x is 64% lower than the industry average of 1.18x. Its forward P/S of 0.38x is 59.5% lower than the industry average of 0.94x.
Street expects BSET’s EPS to increase 145.4% year-over-year to $4.49 in 2022. In addition, its EPS is estimated to grow 16% per annum for the next five years. It surpassed EPS estimates in three of the trailing four quarters. The stock has gained 27.8% year-to-date to close the last trading session at $19.86.
BSET’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall A rating, which equates to a Strong Buy in our proprietary rating system. Additionally, it has an A grade for Sentiment and Quality and a B for Growth and Value. BSET is ranked #2 in the same industry.
Click here to see the additional POWR Ratings for BSET (Momentum and Stability).
FND shares were trading at $89.52 per share on Tuesday morning, up $1.94 (+2.22%). Year-to-date, FND has declined -31.14%, versus a -11.93% rise in the benchmark S&P 500 index during the same period.
About the Author: Riddhima Chakraborty
Riddhima is a financial journalist with a passion for analyzing financial instruments. With a master’s degree in economics, she helps investors make informed investment decisions through her insightful commentaries.
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