Furniture is essentially a necessity in the modern era. Whether it be a recliner or a couch or some other product, a piece of furniture serves as important decor for any interior and it provides convenience, comfort, and style to any residential or commercial property in which it's located. Though it may not seem like the most interesting space to invest in, there are some players in the market that have demonstrated stability over the years and that are trading at levels that should be considered generally attractive. One such company is a firm called La-Z-Boy (NYSE:LZB). Although the company's financial performance has been somewhat mixed in recent years, the overall trend has been positive. Add on to this just how cheap shares look today, even relative to the competition, and it should make for a great prospect for long-term, value-oriented investors.
Today, La-Z-Boy describes itself as a leading global producer of reclining chairs. Not only that, the company is a manufacturer and distributor of residential furniture in the US. It sells its products through a variety of means, including through its retail network of La-Z-Boy Furniture Galleries, which is currently the third-largest retailer of single branded furniture in the country. The company also sells both its own and third-party retail upholstery furniture products under various names. These names include its hallmark La-Z-Boy brand, as well as England, Kincaid, and Joybird. Other products that it sells include retail accessories and casegoods (known as wood furniture) products under a variety of trade names.
As of the end of its latest fiscal year, the company had five major manufacturing locations and seven regional distribution centers in the US. It also has three facilities located in Mexico. This is all on top of a logistics company that it has that distributes a portion of its products to the US, with other products sold internationally. Its footprint includes wholesale distribution operations in the United Kingdom and Ireland, as well as some operations in Hong Kong. In all, the company sells its products to no fewer than 65 countries across the globe. But this does not change the fact that its greatest exposure is to the U.S. market. According to management, 91% of the company's overall sales are to the U.S. market. 5% goes to Canada, with a further 4% attributable to other nations worldwide. The bulk of the company's sales, about 63.7% in all, falls under its wholesale segment. Most of the rest, about 30% of total sales, falls under its retail operations.
In terms of its physical distribution network, the company currently has, at least as of the end of its latest quarter, 351 La-Z-Boy Furniture Galleries stores, as well as 560 La-Z-Boy Comfort Studio locations. It is worth noting that 159 of its La-Z-Boy Furniture Galleries are company-owned, with the rust being independently owned and operated. Meanwhile, all of the 560 La-Z-Boy Comfort Studio locations are independently owned and operated. One interesting piece of information is also just how large its physical footprint is from a square footage perspective. In North America, it has 7.8 million square feet of floor space dedicated to selling its brands. This is in addition to 3 million square feet of space outside of the US and Canada.
Over the past few years, the financial picture for the company has been largely positive. Between 2017 and 2021, for instance, revenue for the company expanded from $1.52 billion to $1.73 billion. That growth has continued into the 2022 fiscal year, with sales in the first half of that year totaling $1.10 billion. That compares to the $744.6 million generated one year earlier.
When it comes to profits, we have seen a similar trajectory. Net income expanded from $85.9 million in 2017 to $106.5 million in 2021. Operating cash flow grew from $148 million to $309.9 million, while the adjusted equivalent, which factors out changes in working capital, would have grown from $122.3 million to $149.1 million. Meanwhile, EBITDA has been much more range-bound, hovering between a low point of $170.6 million and a high point of $185.2 million. In 2021, this figure came in at $182.4 million. For the current fiscal year, things are certainly looking up. Net income in the first half of 2022 was $64.1 million. That compares to the $39.7 million generated one year earlier. Operating cash flow did drop, falling from $195.7 million to $15.4 million. But if we adjust for changes in working capital, it would have risen from $95.9 million to $119.8 million. And EBITDA also grew, expanding from $109.9 million to $147 million.
Management has not provided any real guidance for the 2022 fiscal year that I could find. But if we analyze results seen so far in 2022, then net income should be around $172 million. This pegs operating cash flow at about $186.3 million and EBITDA at around $244 million. Taking this data, we can effectively price the business. On a forward basis, shares are trading at a price to earnings multiple of 9.4. This is an improvement over the 15.1 we get if we rely on 2021 figures. On a price to adjusted operating cash flow basis, the multiple is 8.6, down from the 10.8 we would get if we used the 2021 figures. And using the EV to EBITDA approach yields a multiple of 5.4, down from the 7.2 if we rely on the 2021 data.
To put all of this in perspective, I decided to compare the company to the five highest-rated of its peers as defined by Seeking Alpha’s Quant platform. On a price-to-earnings basis, these companies ranged from a low of 9.5 to a high of 24. Our prospect was the cheapest of the group. I did the same thing using the price to operating cash flow approach, resulting in a range of 6.4 to 47.1. Two of the five companies were cheaper than La-Z-Boy. And finally, I repeated this analysis for the EV to EBITDA approach, resulting in a range of 5.2 to 18.4. One company was cheaper than La-Z-Boy, while another was tied with it. Some investors might make the case that leverage could hurt the business, thereby justifying a lower trading multiple. That would be correct if leverage were a problem. At present, the company has $296.6 million in cash on hand and no debt. So the overall risk to shareholders now is very limited.
|Company||Price / Earnings||Price / Operating Cash Flow||EV / EBITDA|
|Ethan Allen Interiors (ETD)||9.5||6.4||5.4|
|Tempur Sealy International (TPX)||14.8||11.6||10.9|
|Dorel Industries (OTCPK:DIIBF)||10.2||10.9||5.2|
|The Lovesac Company (LOVE)||24.0||47.1||18.4|
|Mohawk Industries (MHK)||11.0||8.0||6.6|
Based on the data provided, I believe that La-Z-Boy is a solid opportunity in the furniture space. The company has a global reach, though there is no denying that its emphasis is very much on the U.S. market. Although financials have been somewhat mixed in some regards, the overall trend has been positive and shares are trading at levels that should be considered cheap on both a relative basis and on an absolute basis. These all point to a bullish outlook from my perspective.
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This article was written by
Daniel is currently the manager of Avaring Capital Advisors, LLC, a registered investment advisor that oversees one hedge fund, and he runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.