La-Z-Boy: A Safe Cushion Against Macroeconomic Pressures (NYSE:LZB)


La-Z-Boy celebrates the opening of the Chicago store with a Blogger event

Daniel Boczarski / Getty Images Entertainment

La-Z-Boy Incorporated (NYSE: LZB) remains a leading figure in the home furniture industry. Since the pandemic, it has seen an increase in demand for its furniture. It is logical, given the impact of the real estate market boom discretionary spending. As such, it maintains robust, profitable and sustainable operations. Revenue growth and margin expansion remain evident as capacity increases.

However, fluctuations in the housing market are a concern today. Rising prices and mortgage rates seem to discourage many buyers. That is why downward pressure on stock prices is visible. However, the underlying power of the company should not be completely ignored. It is able to stabilize and maintain its performance and pay dividends.

Company performance

La-Z-Boy Incorporated remains the leading supplier of recliners in the US. It is also one of the largest home furniture businesses in the country. Amid supply chain disruptions, inflationary pressures and geopolitical turmoil, it remains robust. It continues to provide quality brands to millions of customers in all regions. Thanks to its massive distribution flows that allow it to meet market demand.

This quarter, its operating income amounted to $ 684 million, a growth of 32% year-on-year. It operates in wholesale, retail and corporate segments. All this shows impeccable revenue growth. It is more visible in Joybird, which is 62% more than the previous year. In fact, the company benefits from a strong customer base and growing demand. It is also driven by the expansion of its operational capacity. Your prudent investment in Neosho, MO is accelerating upgrades and renovations to the upholstery floor. Therefore, it enjoys a larger production capacity to meet the needs and preferences of the evolving market. It seems appropriate, given the increasing demand for home furniture.

Operating income

Operating income (MarketWatch)

La-Z-Boy innovates and expands to stimulate efficiency and strengthen its manufacturing footprint. It is also a strategic move to stabilize its operations amid external pressures. As such, it is not disturbed as the world moves into a post-pandemic environment. It also helps keep your costs and expenses manageable. Its new infrastructure can improve its distribution flows for a more efficient supply chain. It can also allow you to improve your asset management and keep up with delays. Its improved production and distribution facilities can lead to economies of scale. It can also be seen in its operating margin of 0.116 compared to 0.096 in Q4 2021.

Operating margin

Operating margin (MarketWatch)

If we compare LZB with his close colleagues, we can see that he stays true to his words. It remains one of the largest suppliers of home furnishings, such as armchairs and sofas. It has a market share of 23.2% compared to 23%, which shows that it maintains its strong market position. In addition, its revenue growth is above the market average of 20%. But you may have to work harder, given the increase in e-commerce and direct to the consumer. The competition is getting tougher with the presence of Amazon (AMZN) and Wayfair (W). However, it can also be an opportunity for the company to expand its niches. It may be possible as you build infrastructure to improve your distribution flows. But of course, it may take more time and effort. In addition, the company continues to improve its retail segment and the direct consumer segment. In fact, Joybird shows a massive increase in the comparative time series. It may still be at a disadvantage compared to Amazon and Wayfair. But it has the potential for sustained expansion.

Sharwe Market

Market share (MarketWatch)

External pressures

The housing market has consequences for discretionary spending. As more homes are bought and occupied, home furnishings become a staple. However, the recent trend in the housing market is disappointing. House prices have skyrocketed over the past two years due to falling interest rates and mortgages. Today, the average price of homes in the United States has already exceeded $ 400,000. Macroeconomic pressures are beginning to intensify as inflation stays above 8%. In turn, interest rates and mortgages may continue to rise. It is not uncommon for housing demand to begin to falter. It is another concern that can affect the demand for home furniture.

But we must also take into account the rising prices of materials and labor to build houses. The United States now has a shortage of more than five million homes, which can take many years to fill. That’s why the housing market remains a staple for millions of Americans. In addition, part of their demand is transferred to the rental of new and old houses. Rental rates are also rising, but are starting to go down. The average increase in 2022 compared to 2020 and 2021 decreases from 18-24% to 14-18%. Amid the housing shortage, renting is still a cheaper alternative for now. Either way, home furnishings will continue to be a staple for many new homeowners and renters.

In addition, their products may be more in demand as more employees choose remote work configurations. Currently, 44% of companies still do not allow remote work settings. But it is clear that the business world is evolving. A recent survey shows that more than 20% of employees would leave if they were forced to return to the office. The percentage seems to increase even further to 33% and even more to 50%. More than 70% of employers aim to increase their spending on maintaining remote and hybrid work configurations. These include virtual communication tools and comfortable seating and tables for employees. With more people staying and working from home, recliners and sofas may continue to be popular.

Business work settings

Business work settings (Apollo Technician)

The solid financial position of La-Z-Boy Incorporated

La-Z-Boy Incorporated continues to show robust performance even in a volatile market landscape. It has strong control over the market with its impressive revenue growth and market share. In addition, it is expanding and innovating to maintain its performance and improve efficiency. Today, there are notable risks and opportunities in the market. Some of them are already in the previous section. The most important thing is how the company can maintain its growth. This is shown by his solid balance sheet.

Cash and cash equivalents are less than $ 248 million compared to $ 395 million. Loans are now higher at $ 430 million compared to $ 362 million. However, it is in line with the continuous expansion and innovation of the company. It is also investing in more infrastructure to improve distribution and manufacturing flows. The increase in capacity can also be seen in the higher value of stocks and PPE. Its current ratio remains reasonable at 1.41%, which shows that it can cover its current liabilities. Also, your 0.95x Net Debt / EBITDA shows that you can cover your loans. It means that the company generates a reasonable income due to its increase in financial leverage. It is much lower than the maximum ratio of 3-4x.

Cash and cash equivalents and loans

Cash and cash equivalents and loans (MarketWatch)

In addition, their efforts are bearing fruit, with their ROA increasing from 2% to 2.9%. It gains more as it expands its operations amid inflationary pressures. As such, the company is viable to maintain its current size and potential expansion. Loans and dividends are still well covered. It has a great ability to maintain its strong market position. Keep in mind that the market offers more opportunities despite economic uncertainty. In fact, the global furniture market and the armchair and sofa market may increase by 5.6% and 9.3% on average.

La-Z-Boy and Home Furniture Sofas and Reclining Market Size

La-Z-Boy and Home Furniture Sofas and Reclining Market Size (PR Newswire and author estimate)

Stock price evaluation

The stock price of La-Z-Boy Incorporation has been on a downward trend for over a year. At $ 24.58, it has already been down 32% from the starting price. The decrease further reveals the undervaluation. Even in my previous article, I recommended it as a purchase. Today, it already has a 46% discount, which makes it cheaper.

The shares are trading at a 7-8x profit multiple, better than Bassett (BSET) and Hooker (HOFT). It is also one of the best in terms of EV / EBITDA ratio with a multiple of 5x. In terms of its book value, the P / B ratio is quite high at 1.29. But, it is much better than in the comparison period with 1.43. It also suggests continuous improvement of its foundations as it expands.

PE ratio, PB ratio and EV / EBITDA ratio

PE ratio, PB ratio and EV / EBITDA ratio (Searching for alpha)

In addition, the company remains consistent with dividend payments. The dividend yield of 2.85% is within the market average. We can evaluate the share price using the DCF model and the dividend discount model.

DCF model

FCFF $ 204,200,000

Cash and cash equivalents $ 248,800,000

Loans $ 430,100,000

Perpetual growth rate 4.2%

WACC 8.8%

Ordinary shares outstanding 43,093,500

Stock price $ 24.65

Derivative value $ 51.16

Dividend discount model

Stock price $ 24.65

Average dividend growth 0.09433043147

Estimated dividends per share $ 0.66

Cost of equity 0.1098052793

Derivative value $ 46.67303296 or $ 46.67

Both models claim that the stock price is undervalued. It seems very cheap, which can offer more opportunities for higher profits. Over the next 12-24 months there may be an increase of 47-52%.

Bottom line

La-Z-Boy Incorporated has robust performance with higher revenue and margins. It is very liquid, which allows it to maintain its operations and cover its debts. However, the stock price is moving in the opposite direction. It is an excellent bargain with modest dividend payments. The recommendation is that La-Z-Boy Incorporated be a purchase.



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