Omnichannel Strength And Warranties Will Drive Long Term Market Share Gains

Catalysts

About Leon's Furniture

Leon's Furniture operates a national network of banners focused on value-driven furniture, appliances and related services for Canadian households and commercial customers.

What are the underlying business or industry changes driving this perspective?

• Sharpened focus on furniture as the largest and highest margin category, supported by tighter assortments and deeper inventory on best sellers, is described as positioning the company to continue gaining share in a fragmented market and to lift both revenue and gross margin over time.
• Growing attachment of profitable, capital-light warranty and insurance offerings, both in-store and with third party partners, is creating a recurring, higher margin earnings stream that is expected to expand overall net margins even in a slower retail backdrop.
• An enhanced omnichannel model that uses digital traffic as a qualification funnel for stores is reported to be driving higher conversion and average ticket sizes, which is expected to support sustained same-store sales growth and incremental operating leverage in earnings.
• Strategic build out of commercial and replacement-focused appliance channels, particularly with property managers and cross country customers of Appliance Canada, is providing a resilient volume base that can help smooth cyclicality and underpin revenue and EPS growth as new build activity moderates.
• Scale advantages in sourcing and logistics, including deeper vendor relationships and First Ocean purchasing penetration, are structurally improving cost of goods and supply reliability, which is expected to help preserve gross margin gains and support steadily rising earnings power.

Assumptions

This narrative explores a more optimistic perspective on Leon's Furniture compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Leon's Furniture's revenue will grow by 2.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 6.8% today to 6.4% in 3 years time.
• The bullish analysts expect earnings to reach CA$178.0 million (and earnings per share of CA$2.82) by about December 2028, up from CA$173.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 24.2x on those 2028 earnings, up from 11.4x today. This future PE is greater than the current PE for the CA Specialty Retail industry at 21.7x.
• The bullish analysts expect the number of shares outstanding to grow by 0.83% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.01%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• A prolonged period of weak Canadian consumer confidence and pressured discretionary spending, combined with structurally higher promotional intensity in retail, could cap like for like volume growth and force deeper discounting, which would weigh on revenue growth and compress gross and net margins over time.
• Normalization and potential decline in the commercial appliance channel as condo and multiunit completions fall after 2026, coupled with a slower ramp in the replacement and property manager segment than management anticipates, could create a multi year drag on the appliance category and stall overall revenue and earnings growth.
• Increasing structural competition in core categories, including more aggressive promotions in mattresses and appliances and the rise of online only and low cost players, may erode Leon's pricing power and share in its highest margin furniture and warranty lines, pressuring gross margin and limiting earnings expansion.
• Ongoing Canada Post disruptions and a long term shift away from physical flyers toward digital marketing, where returns are currently lower than flyer driven traffic, could structurally reduce store visits and diminish the effectiveness of key promotional events, resulting in slower revenue growth and reduced operating leverage on earnings.
• Capital deployment into real estate optimization, warehouse restructuring, renovations and potential acquisitions in a volatile macro and property market could lead to suboptimal returns on invested capital if secular headwinds persist, constraining future free cash flow available for dividends and buybacks and limiting net margin and earnings growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Leon's Furniture is CA$48.42, which represents up to two standard deviations above the consensus price target of CA$36.0. This valuation is based on what can be assumed as the expectations of Leon's Furniture's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$50.0, and the most bearish reporting a price target of just CA$30.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be CA$2.8 billion, earnings will come to CA$178.0 million, and it would be trading on a PE ratio of 24.2x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of CA$28.79, the analyst price target of CA$48.42 is 40.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.