Shares of La-Z-Boy Inc. (LZB) have traded in a tight range despite confirmation in the form of macroeconomic data that a recovery in residential furniture demand is unlikely for 2008. Nevertheless, we are maintaining our underweight recommendation on the stock (which implies downside of 25.0% from current levels), citing firm specific attributes, industry challenges, and valuation.
Touching upon firm specific factors, La-Z-Boy is predominantly funding its operations through debt, cash flow trends have been anemic, and volume is declining at severe double-digit percentage clips across the Company’s retail, upholstery and case-goods businesses. Additionally, we wonder if inflationary headwinds stemming from overseas suppliers will begin to dampen the effect of La-Z-Boy’s price increases, which would create an unfavorable gross margin scenario. Another firm specific concern includes probability for further goodwill write-downs as a result of weak retail fundamentals.
From an industry perspective, declining home values throughout the U.S. are continuing to fuel the downward spiral of the overall housing sector, and when tossing in constrained household budgets, desire to purchase furniture is rendered unrealistic.
Looking at valuation, the stock is trading approximately in line with book value versus others in the sector which are commanding significant discounts to the value of their fixed assets. Moreover, the stock commands a forward PE multiple of 46.5 times estimated FY`08 earnings, extremely high in light of the inherent risks to La-Z-Boy’s business.
Written by Brian Sozzi, a Research Analyst for Wall Street Strategies (www.wstreet.com) specializing in the apparel/hardline goods sectors of the retail industry.