Hello everyone, please see below my DD analysis on La-Z-Boy ($LZB). I would love to hear everyone's opinion.
What Does La-Z-Boy Do?
La-Z-Boy is one of the largest furniture manufactures in the United States. They are based in Monroe, Michigan, and they make home furniture, including upholstered recliners, sofas, stationary chairs, lift chairs, and sleeper sofas.
La-Z-Boy furniture is sold in thousands of retail residential outlets in the United States and Canada and is manufactured and distributed under license in other countries including the United Kingdom, Australia, Germany, Indonesia, Italy, Japan, Mexico, New Zealand, Turkey, and South Africa. La-Z-Boy holds US and international patents on more than 200 different styles and mechanisms. They employ approximately 9400 workers at this time.
La-Z-Boy Incorporated is divided into three reportable operating segments: the Upholstery Group, the Casegoods Group, and the Retail Group.
The Upholstery Group primarily manufactures and sells upholstered furniture to furniture retailers and proprietary stores. This includes recliners and motion furniture, sofas, lift chairs, loveseats, chairs, ottomans, and sleeper sofas.
The Casegoods Group primarily sells manufactured or imported wood furniture to furniture retailers, including tables, chairs, entertainment centers, headboards, dressers, accent pieces, and some coordinated upholstered furniture.
The Retail Group consists of 70 company-owned stores in the US. The Retail Group sells mainly upholstered furniture to end consumers through the retail network.
In July 2018 La-Z-Boy also acquired online furniture company Joybird for an undisclosed amount.
The bull case
- Reason #1 - Oversold - It is trading well below fair value after being dumped over the past 2 days - Nasdaq.com published an article 2 days ago saying the stock was trading 21% below value when it was trading at $42. Now it is at $36, the long-term support, which makes it approximately 33% below fair value. What is the reason for the selloff? In their earnings call, they issued a warning about a temporary negative impact to profit margins in the short term due to raw material price increases right now. However, they also said these issues will be offset by previously announced pricing actions as the company works through its immense backlog in the back half of the year. So basically, the selloff is an overreaction as their earnings report came out the same day Chairman Powell did his press conference and caused the whole market to dump.
- Reason #2 - The stock will recover soon because it does this - Because this stock has a relatively low market cap any negative news causes a dump that soon recovers. Simply looking at the chart over the past 6 months will show other such instances including the last major dump to this support level on February 1 and the subsequent recovery by 10%+ in only 8 days and a 20%+ recovery in just over a month after that.
- Reason #3 - Never before seen boom in home furnishings - Warren Shoulberg, a senior editor at Forbes, noted that LZB is the poster child for the boom in home furnishings sales. r/investing does not allow linking to Forbes due to blog-style articles being published there so I will simply point out some salient points from the story -
If you want to know how real the boom in home furnishings sales is and how much America is spending to make their homes nicer, all you have to do is ask La-Z-Boy.
By one measurement that the company uses, “written same-store sales” for the entire Galleries network doubled, increasing 100% for the quarter. For the year, those sales were up 31%.
Their CEO noted the following in the earnings call (also covered at Forbes) -
For the fiscal 2021 fourth quarter, record sales led to all-time record profits driven by increased production capacity, excellent performance by our company-owned La-Z-Boy Furniture Galleries stores, and continued growth and profitability at Joybird.
Fiscal 2022 is off to a great start with continued robust written order rates and a record backlog, setting us up well for a strong year of shipments ahead.
- Reason #4 - LZB beat on all important metrics including EPS and revenue as per their June 15 earnings report - https://www.marketbeat.com/stocks/NYSE/LZB/earnings/
- Reason #5 -Despite LZB being an iconic furniture brand it is currently cheaper than the furniture industry average thanks to the recent selloff - https://www.zacks.com/stock/chart/LZB/fundamental/pe-ratio-ttm
- Reason #6 - Dividend-paying stock - LZB suspended their dividend last year due to the pandemic but it has been reinstated as of this quarter. Part of the recent selloff was possibly also because the dividend was just paid this month. If they follow the same trend as they always have in years prior to COVID they should be expected to announce their next dividend in late August with dividend payment in early-mid September. Here is their dividend history-
https://www.streetinsider.com/dividend_history.php?q=lzb
The Bear Case
- Reason #1 - Continued global supply chain issues. Raw material prices skyrocket even higher - The primary reason for the selloff appears to be management's warning about a temporary negative impact to profit margins in the short term due to raw material price increases. LZB's problems could be exacerbated if inflation continues to run hot and raw material prices skyrocket even higher.
- Reason #2 - Suspension of dividends again - LZB management suspended their dividend for 4 quarters due to Covid and only recently reinstated it last quarter. A major supply chain disruption or other internal issues could cause them to suspend it again.
Financials & Valuation
LZB balance sheet can be viewed at https://uk.finance.yahoo.com/quote/LZB/balance-sheet?p=LZB for reference to what I state below.
- LZB is a profitable business with a consistent adjusted EBITDA margin of around 10% which is in line with industry standards -https://csimarket.com/Industry/industry_Profitability_Ratios.php?ind=407
- Debt-free - LZB is debt-free.
- Short-term assets ($926.2M) exceed short-term liabilities ($611.7M).
- Short-term assets ($926.2M) exceed long-term liabilities ($392.5M).
- Regarding valuation, I have already covered this in the bull case where LZB is now nearly 33% undervalued as per the Nasdaq.com calculation. The Nasdaq story only says 21% because it was published when the stock price was still $42 and it is now trading around $36.
Based on all this I believe LZB is a great business and iconic brand that is currently trading well below fair value. I believe this represents a great investment opportunity.
TL;DR: LZB stock faced a selloff this week because management warned that record high raw material prices would affect their bottom line in the short term. Management also noted that these issues will be offset by previously announced pricing actions as the company works through its immense backlog in the back half of the year. Considering this, I believe the stock is oversold as it is considered as much as 33% undervalued as per Nasdaq.com at current prices which represents a great investment opportunity.
Submitted June 19, 2021 at 02:57AM by Working_Choice_7785 https://ift.tt/3xu8tQf
