While the furniture sector isn't often remembered in times of crisis, famous recliner maker La-Z-Boy (NYSE:LZB) shows furniture can be a winning market during a pandemic. After the initial drop caused by the coronavirus' arrival in the U.S., the company has produced strong revenue and earnings growth, rewarded by a stock market eager for good news.
But alert investors in consumer discretionary stocks should look closer, examining what La-Z-Boy is doing to turn its current success into future expansion -- which, at this point, appears to be very little.
La-Z-Boy during the pandemic
The pandemic struck during La-Z-Boy's fiscal fourth quarter 2020, which ended on April 25. The company took the brunt of COVID-19 during this quarter, though lockdowns continued into the early part of its fiscal first quarter 2021 and the virus' fallout is still affecting the economy.
Even at the worst of the pandemic, however, La-Z-Boy's sales fell 19.1%, considerably less than the plunges in more-vulnerable industries. The company's resistance to pandemic market conditions was also mirrored in the fact that while its revenue fell 6.16% short of analyst expectations, its earnings per share of $0.49 delivered a positive 58% surprise over the Wall Street consensus.
Since it supplies goods used at home, where many people found themselves obliged to stay by lockdowns and other coronavirus-related measures, La-Z-Boy saw a quick rebound moving into its fiscal first quarter, which includes May, June, and July. After temporary furloughs and pay cuts, along with good levels of liquidity to keep the company operational through the crisis, CEO Kurt Darrow stated during the fourth quarter 2020 conference call, "as we head into July, we expect to be operating at 80% of year-ago volumes" and noted how the company rapidly restarted production to meet demand.
La-Z-Boy followed the same pattern during its fiscal first quarter, which ended on July 25: beating EPS estimates by a considerable margin but missing slightly on revenue. During that quarter's earnings call, Darrow said that with new workers and production at about 90% of capacity, the company experienced delivery lag because of its business model and the earlier production shutdown, but "written same-store sales increased 14.8% in the first quarter" for its Furniture Gallery wholesale segment.
Overall, first-quarter written sales -- which are orders placed, with a deposit, but not yet delivered -- grew by 2.5% in wholesale and 11% in retail, though this figure conceals some detail. Written sales were down 38% in May for wholesale but then rose to almost 30% year-over-year growth for June and July as both the market and La-Z-Boy's production rebounded.
Another consequence of COVID-19 emerged in early June, when La-Z-Boy decided to permanently lay off 10% of its workforce and shutter a six-decade-old upholstery factory in Mississippi. Darrow said the company was aiming to "right-size our business for the long term" and switch to other "highly productive" factories.
Making those job cuts may indeed have been a blessing in disguise, removing an unneeded, outdated factory and streamlining its performance. The sharp improvement, driven by the response to COVID-19, is visible in its operating margin, which was 11.1% in the second quarter, an approximately 48% improvement over the year-ago quarter.
The company also generated big gains in operating income, generally indicating control of overhead and expenses, creating a leaner, better-operated company. Adjusted operating income jumped 52% year over year from $33.7 million to $51.2 million. Other metrics also showed strength:
|Metric||Q2 2021 Result||YOY Change|
|Operating income||$51.2 million||52%|
|Consolidated sales||$459.1 million||2.7%|
|Retail sales||$162.3 million||
The company says it has a large backlog of orders, without specifying the exact amount. La-Z-Boy also reported strong cash generation. Even after repaying a $50 million revolving credit loan it drew down for extra liquidity, it ended the most recent quarter with $353.4 million in cash. The metrics appear to support Darrow's claims of "solid cash generation, a robust balance sheet, and prudent expense management."
You snooze, you lose
What emerges clearly from the latest quarterly report is good demand as people stay at home more and work from home due to the pandemic. Customers are buying comfortable furnishings to improve their quality of life during the pandemic, generating good profits due to better efficiency and reduced expenses, all signs of good management.
The pandemic has indeed created a favorable environment for furniture manufacturers, with Architectural Digest reporting that the Census Bureau and Department of Commerce's August report shows furniture sales growing 2.1% month over month compared to 0.6% growth in general consumer spending during the same period. Darrow referred to stronger-than-expected demand and said the company can significantly increase production on "both an opportunistic and permanent basis."
For investors, however, a potentially disquieting shadow in La-Z-Boy's generally rosy picture is its strategic planning for the future. The company says it is acquiring an upholstery factory in Mexico to provide cost-effective support for greater shipments in the western U.S.
But none of the plans it mentioned break out of its relatively narrow focus and expand into new territory. It seems to be just working on ways to manufacture and distribute its existing product line more effectively, rather than enter new markets as a catalyst for growth.
La-Z-Boy's current strong demand, improved efficiency, and its healthy balance sheet and robust cash position are all factors it could use to branch out into fresh territory.
It could potentially lock in future growth beyond the home furnishings surge prompted by the coronavirus. Possibilities include:
Acquiring smaller businesses to diversify its offerings.
Acquiring or launching an RV furnishings line to tap into massive expansion in the recreational vehicle market, much like Camping World Holdings' partnership with kathy ireland Worldwide.
These are merely examples, but they show there's plenty of room for La-Z-Boy to branch out -- if it decides to. Such plans may indeed be in the works, but if so, its executives have not mentioned them. The COVID-19 demand surge won't last forever, but the company's plans apparently consist of no more than figuring out ways to ship more furniture.
Without broadening its brand or product mix, La-Z-Boy seems unlikely to be able to maintain rapid growth and might well return to adequate but lackluster performance once vaccines are available and the pandemic slowly ebbs.
Current sales figures are splashy, but prudent investors may want to wait for announcements that La-Z-Boy is using its cash and efficiency advantages to acquire new brands or diversify into new markets.