Despite sales being up 5%, La-Z-Boy (LZB, Financial) fell 20% Wednesday sparked by the company's significantly lower operating margins, a reduced level of sales leverage due to lower volume and a warning out of Stifel Nicolaus (SF, Financial) that the costs of adding new stores might continue to drag on margins.
In the last decade, La-Z-Boy has grown its sales back above the pre-housing bubble high water mark, even remaining highly profitable. If this was a private business, it might be a good buy under 15x net earnings. Then again, that assumes too many good things are going to happen in the future. Of course, the market may have to be willing to put a higher multiple on it as long as growth continues.
Has the world been oversaturated with furniture?
Maybe, maybe not. New styles and trends are coming to market every year in the fashion industry, but furniture is more stable and that’s a good thing for La-Z-Boy. More and more people are being born and while fewer people are buying homes, they still need to be furnished. Plus, in many major cities where real estate turnover is high, new home purchases spur new furniture purchases.
Also, with more than 1 billion people lifted out of poverty in emerging markets, the improved standard of living will spur more consumption, especially from online shopping. In fact, La-Z-Boy announced Thursday it was in talks with Amazon (AMZN, Financial) as it seeks to connect with younger shoppers that may be more comfortable making bigger purchases online.
La-Z-Boy might not necessarily be a growth trade, but if it remains committed to finding new ways to sell its namesake recliners and other furniture, the company will continue to make financial progress. The 1.72% dividend yield isn’t enough to simply wait and see what happens so if the company continues to demonstrate less than desirable financial results, don’t hold out for a turnaround.
That being said, this quarter is the lowest of the year, yet the company is looking to earn $2 to $2.20 per share by the end of next year. Couple that with an average price-earnings (P/E) of 19 and you get a 77% rise in price.
At this point, all the gurus who own La-Z-Boy are down. These guys are the best of the best including Paul Tudor Jones (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and Jim Simons (Trades, Portfolio). None of these top money managers have more than 0.10% of their assets in La-Z-Boy so I can’t imagine this hiccup will shake many of them.
Long term, La-Z-Boy has been on a consistent upward swing. Gross margins have improved from 27% in 2008 to 39.8% in the last 12 months. The company has $158 million in cash and less than $1 million in debt. Operating cash flow is up to $130 million from $49 million. Since the 2008 housing bubble the company’s book value is up over 100%, and the company continues to buy back stock.
The company is rock solid. The question is whether the price will generate better than market returns.
Disclosure: I am not long/short La-Z-Boy.
