La-Z-Boy Inc.'s (LZB, Financial) investments in new technology and innovative products could boost its financial prospects.
The upholstered furniture company is aiming to increase its efficiency through additional investment in its supply chain.
Its valuation and growth forecasts suggest the stock offers recovery potential following its 4% decline over the last year.
Investing for growth
The company is continuing to invest in its supply chain in order to lower costs. It plans to spend between $5 million and $7 million this year on changes to its production facilities. This is expected to yield ongoing annual savings for the business of between $4 million and $6 million from fiscal 2021 onward.
The changes to its supply chain include the closure of its facility in Redwood, California, with production being transferred to other facilities owned by the business. In addition, La-Z-Boy will transition its leather cut and sewing operations to Mexico in order to reduce its labor costs.
The business is continuing to invest in its store estate. It is expected to undertake 20 new projects in the current fiscal year, which will include the opening of five new stores and several remodelings. This could increase the size of its total addressable market as well as improve the customer experience.
Innovation
The company’s ongoing focus on innovation could enhance its competitive position versus rivals. For example, in the most recent quarter, it launched an augmented reality app for mobile devices that has increased its customer engagement levels. It is also testing a virtual reality experience in several stores that helps potential consumers visualize the products in their homes. This could catalyze La-Z-Boy’s sales conversion rates as well as differentiate its in-store offerings when compared to sector peers.
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La-Z-Boy’s increasing focus on sustainability could resonate with customers and help to align its products with evolving consumer tastes. At least 30% of its conserved fabric contains recycled plastic bottles. Since 87% of U.S. consumers favor products that have a positive environmental impact, the company’s continued investment in sustainable products could catalyze its earnings over the long term.
Potential threats
The company’s sales performance in its most recent quarter was negatively impacted by weak consumer sentiment. This contributed to a 4.4% sales decline in La-Z-Boy’s Casegoods segment, with the business reporting that consumers are reluctant to make big-ticket furniture purchases given the ongoing trade dispute between the U.S. and China.
Tariffs placed on Chinese imports by the U.S. government currently impacts several items that are sourced by the company. These include most of the covers for its upholstery products, which could further negatively impact La-Z-Boy’s sales in the short run since consumer sentiment is at its lowest level since the start of the year.
The company’s supply chain strategy could mitigate the impact of further tariffs placed on Chinese imports. For example, the business sources the majority of its wood furniture from Vietnam, which means it is not subject to tariffs. It also converts around two-thirds of its covers into cut and sew kits at its Mexican facility. This means the passthrough charge to customers is around 3.5% for non-powered upholstery and approximately 4% for power products. This could provide La-Z-Boy with a strong competitive position compared to its peers, allowing it to gain market share.
Outlook
The company is forecasted to record a 9% increase in earnings per share next fiscal year. The forward price-earnings ratio of 13.6 suggests it offers good value for money.
La-Z-Boy’s focus on innovation and supply chain investments could catalyze its stock price after its 5% underperformance of the S&P 500 over the last year.
Disclosure: The author has no positions in any stocks mentioned.
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