La-Z-Boy, along with other furniture stocks, has experienced a decline over the past year as expectations returned to reality. However, the company’s recent Q4 results and guidance indicate that normalization is underway and growth in the core retail segment is back. Furthermore, La-Z-Boy’s operational quality has improved, leading to a significant increase in cash flow and free cash flow.
Key Points
1. La-Z-Boy had a tough quarter but improved profitability: Despite a decline in revenue compared to last year, La-Z-Boy showed improved profitability. The company’s operational quality improved, leading to a substantial increase in cash.
2. Mixed guidance with Q1 weakness and strength in the back half: La-Z-Boy’s guidance for the future is mixed. While the company expects weakness and declines in revenue and earnings for Q2, they anticipate strength and a return to growth in the back half of the year.
3. The dividend is safe and worth 2.65%: La-Z-Boy is known for being a reliable dividend payer, and the dividend is considered safe. The company pays out a low percentage of its earnings and has a healthy cash flow, making the dividend sustainable. The dividend yield is currently at 2.65%.
La-Z-Boy, a furniture company, faced challenges in the past quarter but managed to improve its profitability. The company’s guidance for the future is mixed, with weakness expected in the first quarter but strength anticipated in the latter half of the year. The company’s dividend is secure and offers a yield of 2.65%, and it is mostly owned by institutions, who increased their holdings in the second quarter. Despite this, there are five other stocks that analysts recommend over La-Z-Boy.
Over the past year, La-Z-Boy and other furniture stocks have experienced declines as unrealistic expectations were brought back to reality. However, with La-Z-Boy’s fourth-quarter results and guidance, it appears that normalization is taking place and growth is returning to the core retail segment. The company’s operational quality has also improved, leading to a significant increase in cash.
While La-Z-Boy is not known for paying special dividends, other furniture makers have done so when their cash balances increase. Therefore, there is a possibility that La-Z-Boy may consider a special dividend. Additionally, La-Z-Boy is known for its consistent dividend payments and distribution growth, so it is likely that the distribution will continue to grow at the current pace or even higher.
Although La-Z-Boy’s dividend may not be the highest in the furniture industry, it is considered to be one of the safest. The company only pays out 17% of its earnings consensus, and its earnings outlook is sufficient to maintain a healthy payout ratio. Furthermore, the company has significantly improved its cash flow and free cash flow compared to the previous year, resulting in a similar effective payout ratio.
In the fourth quarter, La-Z-Boy paid approximately $35 million in dividends and repurchased stocks, while generating $136.50 million in free cash flow. This combined capital return ratio of 22% is sustainable due to the company’s strong balance sheet, which carries no external debt.
La-Z-Boy’s revenue in the tough quarter was $561.3 million, representing an 18% decline compared to the previous year. However, it is important to note that last year’s revenue was near the peak of the market bubble, so the year-over-year comparison is not relevant. When adjusted, the revenue only dropped 12% compared to the previous year. Additionally, the revenue beat expectations by 500 basis points and showed a 17% increase compared to pre-bubble conditions.
Although the Wholesale and Corporate segments experienced declines, the retail segment saw a 4% gain (12% adjusted). While Wholesale and Corporate are expected to continue facing challenges, they are in a good position to handle the downturn.
The margin news is mixed, with the GAAP operating margin falling by 190 basis points and the adjusted margin widening by 40. However, both figures performed better than expected, leading to a significant beat on the bottom line. The adjusted earnings per share of $0.99 only decreased by 7% compared to the 18% decline in revenue, surpassing the AlphaBetaStock.com consensus by $0.27. The expectation is for similar strength in the fourth quarter of 2024. However, the company predicts a year-over-year decline in revenue and earnings for the second quarter, along with margin compression. This news has led to a decrease in the market’s sentiment, despite the expectation of strength and growth in the latter half of the year.
In terms of market activity, analysts have largely given up on La-Z-Boy, with only one analyst currently holding a rating of “Hold” for the stock, and that rating is nearly 12 months old. While there is some upside in the price target, there does not appear to be much attention on it. On the other hand, institutional activity has been mixed, but on balance, it has been net-bearish for the past year. However, institutional buying has increased in the second quarter, and they currently own the majority of the company’s stock.
The recent institutional buying aligns with a potential bottom near the current price levels, although lower prices may still be possible. The market seems to be approaching the bottom of a trading range, which could offer stronger support. In the event that the market falls below this range, it could potentially drop to the lows experienced during the pandemic, although this is not currently expected.
In conclusion, while La-Z-Boy has shown improvement in profitability and has a secure dividend, there are other stocks that analysts consider to be better investments. The company has faced challenges in the past quarter, but it is expected to see growth in the latter half of the year. Institutional investors have shown increased interest in the stock, leading to recent buying activity. However, market conditions may still pose risks.
