Homeowners nationwide are feeling the pinch of stubborn inflation, resulting in decreased spending on home improvement and household furnishing projects. Given this backdrop, it might be wise to steer clear of struggling home improvement stocks Whirlpool Corporation (WHR), RH (RH), and The Scotts Miracle-Gro Company (SMG).
The Labor Department reported that the Consumer Price Index (CPI) rose 0.4% for the month, putting the annual inflation rate at 6%. As inflation remained elevated, consumers pulled back on their spending last month, and US retail sales fell 0.4%. Spending on furniture and home improvement products was significantly affected, with department stores and furniture/home stores experiencing the largest monthly declines of 4% and 2.5%, respectively.
The home improvement industry is negatively impacted by inflation due to increased costs of materials, high borrowing costs, and reduced consumer purchasing power. This led to weakened demand and lower economic growth, making it challenging for companies to operate in this industry.
The Leading Indicator of Remodeling Activity (LIRA) released by the Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University foretells a drastic deceleration in the annual growth rate of home renovation and maintenance spending from 16.3% at the end of 2022 to a mere 2.6% by this year-end.
Carlos Martín, Project Director of the Remodeling Futures Program at the Center, said, “Slowdowns in existing home sales, house price appreciation, and mortgage refinancing activity coupled with growing concerns for a broader economic recession will cool home remodeling activity this year.”
He added, “Homeowners are likely to pull back on high-end discretionary projects and instead focus their spending on necessary replacements and smaller projects in the immediate future.” Investors’ waning interest in home improvement stocks is evident from the S&P 600 Home Improvement Retail Sub-Industry Index’s 37.1% decline over the last six months.
Let us explore why avoiding fundamentally weak, expensive home improvement stocks WHR, RH, and SMG could be wise.
Whirlpool Corporation (WHR)
WHR manufactures and sells household appliances and services across six continents. Its product range includes refrigeration, laundry, cooking and dishwashing appliances. The company distributes its products through various channels such as retailers, dealers, builders, manufacturers and directly to consumers.
In terms of forward non-GAAP PEG, WHR is trading at 9.33x, 620.1% higher than the industry average of 1.30x.
For the fourth quarter that ended December 31, 2022, WHR’s net sales decreased 15.3% year-over-year to $4.92 billion, while its gross margins declined 39.3% year-over-year to $645 million. The company’s operating loss stood at $1.43 billion, compared to an operating income of $495 million in the prior year’s period.
In addition, WHR’s net loss came in at $1.60 billion, compared to net earnings of $300 million in the previous year’s quarter. Net loss available to WHR stood at $29.35, compared to EPS of $4.90 in the same quarter in 2021.
Analysts expect the company’s EPS to decline 18.3% year-over-year to $16.04 in the fiscal year ending December 2023. The company’s revenue for the current year is expected to decrease by 3.4% from the prior year to $19.06 billion. Also, WHR missed the consensus revenue estimates in three of four trailing quarters, which was disappointing.
Over the past year, the stock has slumped 23.6% to close the last trading session at $132.02.
WHR’s weak fundamentals are reflected in its POWR Ratings. It has an overall D rating, equating to Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
The stock also has a D grade for Growth. It ranks #44 out of 56 stocks within the Home Improvements & Goods industry.
Click here to see the other WHR ratings for Value, Momentum, Stability, Sentiment, and Quality.
RH is a retailer specializing in home furnishings. It sells its products under RH Galleries and RH brand names in Canada and the District of Columbia. The company offers furniture, lighting, textiles, bath-ware, garden, and child and teen furnishings. It distributes its products through retail galleries, online platforms and catalogs.
On March 30, Gary Friedman, CEO of RH, stated that the company’s decline was due to rising interest rates, inflation, stock market instability, and banking crises. He also expressed dissatisfaction with the industry discounting and reiterated his view that the housing market was collapsing.
Jefferies (JEF) analyst Jonathan Matuszewski opined that RH’s trading levels are not conducive for buying owing to the anticipated “challenging business conditions” over the next few quarters.
In terms of forward EV/Sales and Price/Sales, RH is trading at 2.50x and 1.76x, which are 121.3% and 103.9% higher than the industry averages of 1.13x and 0.86x, respectively. Its forward Price/Cash Flow of 11.80x is 34.9% higher than the 8.75x industry average.
For the fiscal 2022 fourth quarter (ended January 28, 2023), RH’s adjusted net revenues decreased 14.3% year-over-year to $772.50 million, while its adjusted gross profit declined 18.7% from the year-ago value to $369.41 million. Furthermore, the company’s adjusted net income and EPS came in at $72.78 million and $2.88, down 55.6% and 49.1% year-over-year, respectively.
Analysts expect RH’s EPS for the year fiscal (ending January 2024) to decrease 42.4% year-over-year to $11.55. The company’s revenue for the ongoing year is expected to decline 15.1% from the previous year to $3.05 billion. Shares of RH have plunged 19.6% over the past month and 25.3% over the past year to close the last trading session at $243.55.
RH’s bleach outlook is reflected in its overall D rating, equating to Sell in our POWR Ratings system. It also has a D grade for Growth, Stability, Sentiment, and Momentum. The stock ranks #47 out of 56 stocks in the Home Improvement & Goods industry.
Click here to access RH’s rating for Value and Quality.
The Scotts Miracle-Gro Company (SMG)
SMG manufactures and markets lawn, garden care, and hydroponic products. Its offerings include fertilizers, grass seed products, pest control, hydroponic products and more. The company sells its products through a wide network of retailers, including nurseries, e-commerce platforms and drug stores.
In terms of forward non-GAAP P/E, SMG is trading at 20.93x, 53.2% higher than the industry average of 13.66x. Also, its forward EV/Sales and EV/EBITDA multiple of 1.97x and 13.38x are 30.3% and 78.9% higher than the industry averages of 1.51x and 7.48x, respectively.
During the fiscal 2023 first quarter that ended on December 31, 2022, SMG’s net sales decreased 7% year-over-year to $526.60 million, while its gross margin declined 19.4% year-over-year to $95.70 million. The company’s loss from operations widened by 18.1% from the year-ago value to $41.80 million.
Additionally, SMG’s adjusted net loss and adjusted net loss per share worsened by 16% and 15.9% year-over-year to $56.40 million and $1.02, respectively.
The consensus EPS estimate of $3.33 for the year fiscal (ending September 2023) indicates an 18.7% decline year-over-year. The consensus revenue estimate of $3.84 billion for the current year reflects a 2.1% decrease from the prior year. Moreover, the company missed the consensus revenue estimates in three of the trailing four quarters.
The stock has plunged 16.5% over the past month and 43.3% over the past year to close its last trading session at $69.74.
SMG’s POWR Ratings reflect this poor outlook. The stock has an overall D rating, which equates to Sell in our proprietary rating system. It has an F grade for Stability and a D for Sentiment. It is ranked last out of 56 stocks within the same industry.
In addition to the POWR Ratings I’ve highlighted, you can see SMG’s ratings for Growth, Value, Quality, and Momentum here.
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WHR shares were trading at $131.27 per share on Monday afternoon, down $0.75 (-0.57%). Year-to-date, WHR has declined -6.00%, versus a 7.50% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal’s passion for financial markets drives her to work as an investment analyst and journalist. She earned her bachelor’s degree in finance and is pursuing the CFA program. She is professional at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns. more…