Two retail standouts are shaking up a tired piece of the industry

At Home store
Source: At Home
At Home store

The home decor industry is getting a whole new look.

As sales at furniture and home furnishings stores outperform the broader retail industry, many of the category's legacy brands have struggled to keep pace. That's created an opportunity for Wayfair and At Home, two up-and-coming retailers that are going after a market they say has been underserved.

Amid a wave of holiday sales reports that mostly disappointed, both Wayfair and At Home were bright spots. At the ICR Conference in Orlando, Florida, Wayfair CEO Niraj Shah reiterated the company's strong results during the five-day stretch that ended Cyber Monday, adding his previous concerns about a softer consumer environment did not materially weigh on the online retailer's holiday sales.

Meanwhile, burgeoning retail chain At Home raised its forecast for fourth-quarter and full-year comparable sales, previewing what it expects will be its 12th straight quarter of same-store sales increases. That's as the retailer is adding more locations to its footprint, having more than doubled its store count over the past four years. Eventually, the chain predicts it can grow to 600 locations by taking over space formerly filled by the likes of Sports Authority and Kmart.

Though they're approaching the market in different ways — most notably, Wayfair operates only online, whereas At Home sells its merchandise only in stores — they're both grabbing share in a category that's both fragmented and behind on innovation.

"With the death of furniture in many of the department store retail environments, you really don't have a good high-middle-end of home decorating," Greg Portell, a partner in A.T. Kearney's consumer and retail products practice, told CNBC.


Wayfair.com website homepage.
Source: Wayfair.com
Wayfair.com website homepage.

Though both companies' revenues ring in substantially lower than the legacy brands they're competing against — Wayfair, for example, is roughly a fifth the size of Bed Bath & Beyond — their sales growth is handily outpacing their more traditional competitors.

Wayfair's retail revenue grew 53 percent in the third quarter, to $832.4 million, and rose at a similar rate during the five days that ended with Cyber Monday. At Home, which went public in August, has grown net sales at a 20 percent compound annual growth rate over the past four years. The company expects sales to reach as high as $761 million for the year.

Much of both companies' success can be traced back to their product, which spans furniture and home decorating. Both retailers boast a long roster of merchandise that's brought to market quickly, and allows them to stock more on-trend goods.

With more than 7 million items provided by 7,000-plus suppliers, Wayfair takes on little to no risk when adding a couch or rug to its online inventory. That allows it to swiftly change up its offering.

At Home's speed comes from the fact that it designs 70 percent of merchandise, which likewise enables it to remove cost. It has a three- to nine-month development process, compared with close to two years for legacy chains in this space. CEO Lee Bird likens At Home's approach to fast-fashion players Zara and H&M, which have disrupted the apparel industry by selling stylish clothes at a low-price.

"The market deserves a low-price leader [in home furnishings]," Bird told CNBC, adding that shoppers don't care about the labels they cut off their throw pillows. "We're democratizing home fashion."

Despite their similarities, there are nuances between Wayfair and At Home. The most notable is that Wayfair operates only online, and does not yet see expansion into bricks-and-mortar as the best way to spend its money in the near future, Shah told CNBC.

The reverse is true for At Home, which sells merchandise at a lower price than Wayfair and other competitors. Its growth strategy hinges on opening new stores, which are paid for in two years. Though Bird does not count out eventually rolling out some e-commerce capabilities (shoppers can currently browse the selection online) he said he prefers to keep the business in the physical world, where customers can accurately see the color of a throw pillow they're trying to match to their couch.

They also face unique challenges.

For Wayfair, perhaps its biggest headwind is making shoppers comfortable with the idea that they can buy furniture online, without first seeing it in person. It's addressing this concern by rolling out augmented reality applications that help shoppers envision a couch or coffee table in their living room. It also has flexible shipping and return policies, which lower the risk for consumers, Portell said.

From an investing standpoint, the biggest criticism against Wayfair is that rising sales have not yet been accompanied by profitability. Shah told CNBC the company is making strides toward turning a profit, and is working toward becoming free cash-flow positive in the near to short term.

"We're well on that trajectory," he said.

For At Home, which changed its name from Garden Ridge about two years ago, challenges include introducing its brand to new customers, and persuading infrequent home décor shoppers to make the trip to its stores for small purchases.

It's addressing the first headwind by making a big marketing push when it enters a new market, and targeting young consumers who are decorating their dorms or apartments for the first time. As for the latter issue, Bird is focused on making At Home's stores easy to navigate, and potentially rolling out in-store pickup down the road. The average visitor spends an hour in an At Home store, Bird said.

Yet even as both companies face challenges, there's opportunity for both in a fragmented market.

"Home for the big-box guys, it tends to be an ancillary category," Wayfair's Shah told CNBC. "It's a category that's historically been slow to change."