The No. 1 Home Goods Stock to Buy Now

The retail space has gotten increasingly competitive over the last half decade. Part of that is the rise of the e-commerce market, which has already claimed the likes of Circuit City and Radio Shack.

And e-commerce has recently been causing a lot of pain for investors in home goods stocks.

Over the last three months, shares of Bed Bath & Beyond (NASDAQ: BBBY) are off 15%, Pier 1 Imports (NYSE: PIR) is down 40% and The Container Store (NYSE: TCS) is down 36%.

The two companies holding up relatively well are Williams-Sonoma (NYSE: WSM) and Restoration Hardware (NYSE: RH). The two are down just 7% and 3%, respectively, for the year.

Still, the industry is enticing, especially when you consider the top home goods stock. You have strong tailwinds, like a strengthening housing market and rising employment, to support the industry.

Home goods retailers can hold their own going forward as well, where shoppers are still showing a preference for visiting physical stores to shop for items like linens, cookware and end tables.

So, which is the best home goods stock?

The Pier 1 Imports valuation appears compelling on the surface, but it’s in a rough spot, with margins that are near the bottom of the industry. The Container Store is in a similar position.

Both Restoration Hardware and Williams-Sonoma are relatively expensive from a valuation standpoint, trading at a price-to-earnings ratio of 42 times and 23 times, respectively.

But watch Williams-Sonoma, as it does have opportunities with international growth, which could juice earnings relatively quickly. Williams-Sonoma gets over half its revenues from high-margin e-commerce channels. It’s also one of the few home goods stocks to offer a dividend, with a history of dividend increases too.

The Top Home Goods Stock

Bed Bath & Beyond, which is cheap at just 11 times earnings, has the best margins in the industry and is still generating 20% return on invested capital. Helping drive the stock down of late has been earnings constraints from technology and e-commerce investments. Its quest to offer competitive pricing hasn’t helped earnings, but it is helping the company hold its market share.

But Bed Bath & Beyond still has an opportunity to capture more of the e-commerce and omnichannel market. This includes focusing more on ways for the customer to purchase than just in-store and buy-online-and-ship, such as making online shopping appointments, reserving products online, picking up products in-store and buy online then return to store.

Bed Bath & Beyond Has Advantages

To some extent, the physical stores offer competitive advantages. In truth, that’s what Restoration Hardware has built its model on. In terms of Bed Bath & Beyond’s physical store differentiation, it tailors its merchandise to geographical areas and has a tight layout that allows it to pack a lot of products into a small store footprint. 

Look for Bed Bath & Beyond to start diffusing its other brands into new geographical areas to grow revenue and its footprint. These include buybuy Baby, Harmon, and Cost Plus World Market.

Big ticket furniture items will likely remain on the back burner for many shoppers, but that’s more of a negative for the likes of Pier 1 than Bed Bath & Beyond. Bed Bath & Beyond is still doing well with small appliances and other less discretionary items like cookware, towels and linens. It also has a stable customer base from the wedding and gift registry businesses.

It also has a commitment to returning capital to shareholders, buying back $2.2 billion shares last year and putting in place a $2.5 billion plan this year. Over the last two year, it’s returned over 90% of its cash flow to shareholders.

In the end, it’s never easy to find good cheap stocks when the entire industry is up in arms. Sorting through the rubble of the home goods industry, it appears that Bed Bath & Beyond is your best bet.

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