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Home Furnishing: Deciphering Mixed Signals at the Chain Level

RJ Hottovy
Aug 19, 2022
Home Furnishing: Deciphering Mixed Signals at the Chain Level

The home improvement category may be showing signs of life, but home furnishing retailers are telling a more cautionary tale as of late, with many chains linking a difficult macroeconomic environment, rising interest rates, ongoing supply chain constraints, and the shift from goods to services to worsening sales declines. Wayfair recently noted that its “mass customers are being more deliberate about where their discretionary dollars are going, as prices at the gas station and grocery store eat up a greater share of wallet” and that for the past few months, they’ve “also seen many of those discretionary dollars flow away from goods to services, especially travel as a slow to start spring turned quickly into summer.” Placer.ai visitation data confirms that the home furnishing category underperformed other hardlines categories (below).

Nevertheless, there are other home furnishing companies that have reported more optimistic figures. Arhaus–a brand we highlighted as one to watch at the beginning of the year–noted that demand for its product remained strong and that while comps moderated from April to June, there wasn’t anything meaningful “that shows a change in actual consumer behavior”. With these conflicting narratives, we thought we’d take a deeper look at chain-level trends across the category to better understand why some brands are outperforming.

Because Arhaus caters to a more affluent audience, we started by comparing YoY change in visits for a number of home furnishing retail chains and trailing-twelve-month household income for these retailers’ aggregated trade areas. Not surprising, we found a positive correlation between trade area household income and visitation trends, with chains that cater to more affluent customers like Arhaus and Crate and Barrel among the only chains that posted positive YoY visitation growth (below). Other chains catering to a higher-end customer like West Elm and Ethan Allen also outperformed on a relative basis. However, household income doesn’t explain everything as other high-end chains like RH and Pottery Barn more aligned with the mid-teens decline in foot traffic that we saw across the category

Pricing may have also played a part in the variance in visitation trends across the category, as Arhaus manufactures a higher percentage of its products domestically compared to peers and wasn’t forced to raise prices to the same magnitude as competitors pressured by elevated shipping costs. Nevertheless, we don’t believe that this completely explains the difference and that the outperformance of Arhaus and some of the other top performing chains have benefitted from factors we highlighted in our July 1 update, including site selection (benefiting from markets with positive migration gains), targeted marketing campaign, and investments in store personnel to improve the overall customer experience. Arhaus management noted that its customer visits are more tied to stock market volatility, but that it’s seeing less correlation between these factors this quarter and lending more credence to the hypothesis that company-specific factors are at play. As for the home furnishing category as a whole, we believe it’s reasonable to expect the category to remain under pressure over the foreseeable future, but with perhaps some relief as a decrease in container costs allow category level pricing to normalize.

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RJ Hottovy

Head of Analytical Research, Placer.ai

R.J. Hottovy, CFA has covered the restaurant, retail, and e-commerce sectors for nearly 20 years as an equity analyst and strategist for Morningstar, William Blair & Co., and Deutsche Bank.

R.J. also brings a wealth of experience with early-stage investments as an investment committee member for the IrishAngels / Vitalize venture capital group. Over the past three years, he has advised over 50 foodservice and foodservice tech companies on more than $200 million in early-stage capital raises and M&A transactions.

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