By Dave Marino-Nachison (TMF Braden)
June 1, 2000

Though the reclining chair business might be well characterized, for several reasons, by the term "sleepy," lap-making legend La-Z-Boy (NYSE: LZB) likes to shoot for buzz from time to time by introducing gadgety new chairs. The company's growth into a $1.3 billion business was spurred by innovation in 1929 when the founders upholstered a popular, but seasonal, wooden porch chair to engender year-round sales.

That tradition has continued right up into fiscal 2000 (ended April 29), during which the company introduced not only the cooler, phone, massage, and heater-toting Oasis recliner but the Explorer -- which incorporates comfort with digital technology from Sony (NYSE: SNE) and Microsoft (Nasdaq: MSFT).

But La-Z-Boy isn't out to hook the world on the indoor equivalent of flying cars. At its core, the company is still a bread-and-butter furniture business featuring sofas, chairs, upholstery, and, of course, recliners. Executives believe a continued strong economy and the lure of indoor attractions will help boost the company's sales. Though snooty, New York City designer types might scoff at the recliner, an increasing cultural casualness might also help. (Click here for a story on increasing cultural casualness, featuring quotes from a snooty NYC designer type.)

Over the past year, the company has tried to boost topline growth and fill out its product offerings through acquisition, in large part by buying family-owned businesses with a reputation for quality and workmanship -- and which inhabit middle and higher price points. The company shoots for 10% annual growth, COO Gerald Kiser said in a March interview with the Wall Street Reporter.

This year the company closed on three buys: residential and contract furniture maker LADD Furniture, medium-priced upholstered furniture company Alexvale, and department store furniture maker Bauhaus USA. The three accounted for approximately $223 million, or 85%, of the company's topline growth for the fourth quarter, pointing to "organic growth" of approximately 16%.

Though trying to figure the effect of acquisitions on the company's full-year numbers is somewhat difficult given the figures available and overlapping fiscal years, here's an estimation: LADD, Bauhaus, and Alexvale had approximately $760 million in calendar 1999 revenues. That's about half what La-Z-Boy had in sales for the year.

"We again exceeded our three publicly stated financial goals for the year," said Kiser. "Sales growth from La-Z-Boy's existing operations exceeded industry growth; operating profit margin increased; and operating return on capital again exceeded 20%. Although the recent short-term interest rate hikes by the Federal Reserve Board are of some concern, insofar as they may lead to a dampening of overall U.S. consumer demand, we believe the long-term sales outlook for both our industry and La-Z-Boy continues to be strong."

As La-Z-Boy continues to add new products, employees, and distribution capabilities, the real question is how, or how much, they affect operating performance. That's a determination that's difficult to make in the short-term, since purchases take time to integrate. Over the last three years, the company has more or less held gross, operating, and net margins fast, which if nothing else suggests the company is effectively managing its business if not sitting on loads of unlocked growth potential.

That hasn't been enough to excite investors over the last 12 months, however, as concerns about the scale of the LADD acquisition might be holding investors back. As with many a mature company and industry, even the best-known and revered companies must find ways to get investors excited about long-term growth opportunities. Outpacing the Standard & Poor's 500 Index, something La-Z-Boy stock hasn't managed over the last five years even in good times, should be the goal for investors looking for better options than an index fund.

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