Expanding Retail And Manufacturing Footprint Fuels Optimism In Furniture Industry Growth

Key Takeaways

• La-Z-Boy's emphasis on expanding company-owned stores and the Furniture Galleries network aims to boost direct customer interactions and profitability through integrated operations.
  
• Strategic investments in North American manufacturing and global supply chain optimization are expected to enhance delivery times, operational efficiency, and adaptability to market demands.
  
• La-Z-Boy faces declining revenue and earnings due to industry headwinds, high housing costs, geopolitical uncertainty, and challenges in consumer spending and store traffic.

Catalysts

Manufactures, markets, imports, exports, distributes, and retails upholstery furniture products in the United States, Canada, and internationally.

• La-Z-Boy's focus on expanding its company-owned retail segment through execution, new, and acquired stores is poised to enhance direct control over customer experiences and improve retail margins by integrating wholesale and retail operations.
  
• The company's strategic growth in its Furniture Galleries network and emphasis on acquiring independent La-Z-Boy dealers are expected to directly contribute to increased revenue and profitability, capitalizing on the integration of wholesale and retail margins.
  
• La-Z-Boy's significant investments in expanding its North American manufacturing footprint aim to shorten delivery times for custom furniture, enhancing customer satisfaction and driving sales growth with improved supply chain agility impacting revenue and gross margins.
  
• Strengthening foundational capabilities, particularly by optimizing global supply chain operations, is set to improve operational efficiency and reduce costs, which could lead to better net margins by offsetting input costs and adjusting to market demands more swiftly.
  
• The focus on product development and consumer-centric innovations, especially in the motion and reclining categories where La-Z-Boy holds market leadership, is expected to fuel sales growth and enhance earnings by aligning product offerings with consumer trends and preferences.

Assumptions

• Analysts are assuming La-Z-Boy's revenue will grow by 2.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.9% today to 6.6% in 3 years time.
• Analysts expect earnings to reach $147.5 million (and earnings per share of $3.63) by about October 2027, up from $121.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.9x on those 2027 earnings, up from 13.9x today. This future PE is greater than the current PE for the US Consumer Durables industry at 12.1x.
• Analysts expect the number of shares outstanding to decline by 0.93% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.58%, as per the Simply Wall St company report.

Risks

• The continued furniture and home furnishings industry headwinds and broader consumer discretionary purchase malaise indicate potential for continued or worsening challenges in consumer spending, impacting La-Z-Boy's revenue.
  
• The structural headwinds of elevated mortgage rates and high housing costs along with global geopolitical and economic uncertainty could further dampen big-ticket purchases, including furniture, affecting La-Z-Boy’s revenue growth.
  
• The decline in written same-store sales for the company-owned retail segment and the entire La-Z-Boy Furniture Galleries network reveals challenges in store traffic and consumer spending, which could impact future earnings.
  
• Challenges in the casegoods segment due to higher container rates and the impact on international wholesale business from a combination of temporary customer disruption, lower consumer demand, and higher container rates may lead to margin compression and negatively affect net margins.
  
• The near-term margin compression expected in the retail segment due to anticipated negative same-store sales trends and the impact of store acquisitions might reduce overall profit margins and earnings.

Valuation

• The analysts have a consensus price target of $43.0 for La-Z-Boy based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.2 billion, earnings will come to $147.5 million, and it would be trading on a PE ratio of 14.9x, assuming you use a discount rate of 8.6%.
• Given the current share price of $40.37, the analyst's price target of $43.0 is 6.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.