After Falling, Is La-Z-Boy A Value Play Or A Stalwart?

Aug.20.14 | About: La-Z-Boy Incorporated (LZB)

Summary

After reporting results for the quarter, shares of La-Z-Boy fell in after-hours trading.

Even though revenue handily outperformed estimates, the company posted profits that, while nice, were slightly lower than forecasted.

Given its performance, the retailer looks like an attractive prospect in the long run, but it's certainly no value play at current levels.

After the market closed on August 19, shares of La-Z-Boy (NYSE:LZB) fell more than 4%, following an earnings release that showed revenue topped forecasts for the quarter, but earnings per share missed what Mr. Market had hoped for. In light of this development, should investors give La-Z-Boy a shot with its stock currently trading near a 52-week low, or would it be wise to stay away?

Strong sales were overshadowed by lackluster earnings growth

For the quarter, La-Z-Boy reported revenue of $326.98 million. In addition to coming in 7% above the $305.5 million management reported during the first quarter of its 2014 fiscal year, the company's results handily beat the $321.28 million analysts anticipated. According to its press release, this rise in revenue was driven by a 1% increase in comparable store sales, combined with a 10% jump in its Retail segment and a 6.8% improvement in its Wholesale operations.

Earnings Overview
Last Year's Forecasted Actual
Revenue (millions) $305.50 $321.28 $326.98
Earnings per Share $0.18 $0.21 $0.20
Click to enlarge

Although La-Z-Boy reported strong sales growth, the company couldn't quite do the same in terms of profitability. For the quarter, the business recorded earnings per share of $0.20 ($0.25 if you add in discontinued operations). This represents an 11% increase over the $0.18 management reported this time last year, but fell shy of the $0.21 Mr. Market wanted to see. While higher sales contributed to this rise in revenue, the company also benefited from a drop in its cost of goods sold from 66.8% of sales to 66%.

La-Z-Boy didn't do so bad, but it's still a bit pricey

Interestingly enough, Mr. Market appears to be looking at La-Z-Boy from an odd angle. Yes, the retailer's profits narrowly missed, but the fact that profits are rising and sales are soaring suggests that this might be a mistake on Mr. Market's end. In spite of this, however, it doesn't necessarily mean that shares of La-Z-Boy are in bargain territory.

At its after-hours trading price of $22.28, shares of La-Z-Boy are trading just 10% above their 52-week low and 29% below their 52-week high. While this might be a good time to consider jumping into the fray, investors should know that the business is still on the high end in terms of cost. Given its forward earnings, the company can be bought at a P/E of 15.9.

Current Valuation
Forward P/E Enterprise/Forward Earnings Enterprise/Free Cash Flow
Multiple 15.9 14.3 18.5
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Not bad considering the current P/E of almost 20 that the S&P 500 is at, but definitely not cheap. Put another way, the company's enterprise value is 18.5 times last year's free cash flow, and is currently at 14.3 times forward earnings. While none of these are particularly pricey, they do suggest that La-Z-Boy isn't the cheapest thing around.

Takeaway

Moving forward, it will be interesting to see what happens with shares of La-Z-Boy. Despite the fact that profits came in below forecasts, the retailer is showing some attractive growth on both the top and bottom lines, and is likely to be an attractive long-term play many years down the line. Investors should not, however, buy the company's stock just because it is low, with the thought that they can make a quick buck. While this is a possibility, the fact that it's trading at a level that is somewhat costly implies that it's not a value play, but is, instead, more likely to be a stalwart that will grant slow and steady returns over time.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.