Home Goods Market Update – December 2023

Home Goods Market Players Continue to Pursue Inorganic Growth Through 2023

Capstone’s latest Home Goods Market Update reports that moderating inflation and continued consumer resilience have helped drive optimism for an improved Home Goods market in 2024. Consumer spending through September has defied many economic forecasts, with personal consumption expenditures rising 0.7% month-over-month (MoM), according to the Bureau of Economic Analysis. While the Home Goods space has witnessed healthy demand, sector spending has trailed the broader market with expenditures on furnishings and durable household equipment rising a modest 0.3% MoM. Sustained disinflation will continue to be a tailwind for sector participants—particularly as consumer wage growth has outpaced inflation and select Home Goods categories have recently experienced deflation.

Pandemic-driven inventory shortages scarred many retailers, leading to excess product on shelves that sector participants have continued to offload, often through promotional activity. As more stringent inventory strategies and destocking have been employed by retailers, sales among household products brands have been strained. Leading branded consumer products and home essentials provider, Spectrum Brands (NYSE:SPB) recorded a 10.1% net sales decline year-over-year (YOY) in its fiscal Q3 2023, largely attributed to retailer inventory management strategies, according to its earnings release. However, early signs point to retailers beginning to record more normalized inventory positions. Through September, inventories for Furniture, Home Furnishing, Electronics, and Appliances retailers fell 11.6% YOY, marking the seventh consecutive month of declines, according to the Census Bureau. Upon a return to more robust sector spending, retailer inventory levels will likely need replenishing—fueling healthy demand for sector participants.

Moving through year end and into 2024, sector demand will continue to be dictated by the strength and resilience of the consumer. Through year-to-date (YTD), consumer spending has remained robust and inflation has trended downwards which has provided optimism for market participants. Sector players are expected to continue to eye consolidation opportunities, with strategic buyers driving the vast majority of merger and acquisition (M&A) volume through YTD. Privately-owned companies with defensible revenues, strong gross margins, and healthy supply chains are poised to attract robust acquirer appetite. Consumer industry M&A activity is likely to improve in 2024, providing additional tailwinds to the Home Goods space.

M&A volume in the Home Goods segment has accelerated compared to the prior year, rising 18.9% YOY to 132 transactions announced or completed. The outperformance of the space in the M&A market is in sharp contrast to public markets where average YTD returns in the Furniture and Home Furnishing, Household Products, and Lawn & Garden segments have fallen 15.6%, 18.8%, and 0.51%, respectively. Strategic buyers have driven the strong level of sector transaction volume, comprising 75% of YTD dealmaking.

Also included in this report:  

• Commentary on key drivers of M&A activity in the current market and valuation trends.
• Discussion of recent disinflation in select Home Goods categories.
• Outlook for dealmaking through year end and into 2024.