La-Z-Boy Reclines To The Buy Zone As Industry Normalizes

La-Z-Boy NYSE: LZB and other furniture stocks have declined over the past year as bubble-infused expectations were returned to reality. The takeaway from La-Z-Boy’s Q4 results and guidance is that normalization is at hand, and growth in the core retail segment is back in the picture. More importantly, operational quality improved, leading to a substantial cash increase. 

La-Z-Boy isn’t known to pay special dividends, but other furniture makers are, specifically when their cash balances swell, so that is a possibility. La-Z-Boy is a well-known dividend payer and distribution grower, so there is an even greater possibility that distribution growth will continue at the current pace or higher. 

La-Z-Boy’s dividend isn’t the highest in the furniture industry but is among the safest. The company pays out only 17% of its earnings consensus, and the outlook for earnings is sufficient to maintain a healthy ratio. More importantly, cash flow and free cash flow were significantly improved compared to the previous year putting the effective payout ratio in a similar position.

The company paid roughly $35 million in dividends and repurchased in Q4 compared to the $136.50 million in FCF, making a combined capital return ratio near 22%. That is incredibly sustainable given the company’s balance sheet, which carries no external debt. 

La-Z-Boy Falls On Solid Results, Mixed Guidance

La-Z-Boy had a tough quarter with revenue of $561.3 million, falling 18% compared to last year. The mitigating factor is that last year was near the bubble's peak, so the YOY comp is irrelevant. More to the point, the revenue is down only 12% compared to last year’s adjusted results; 2022 included an extra 53rd week, it beat the consensus by 500 basis points, and the comp versus pre-bubble conditions is up 17%.

The retail segment led with a gain of 4%, 12% adjusted, offset by a decline in Wholesale and Corporate. Wholesale and Corporate are expected to remain weak but are in a good position to weather the downturn. 

The margin news is mixed with the GAAP operating margin falling 190 bps and the adjusted margin widening by 40. The takeaway is that both figures are better than expected and left to a substantial beat on the bottom line. The adjusted $0.99 is down only 7% compared to the top-line 18%, beating the Marketbeat.com consensus by $0.27. That’s 3750 bps better than forecast, and similar strength is expected in Q4 2024. 

The bad news is that YOY declines in revenue and earnings are expected in Q2. The company expects revenue to fall by 22% at the low end of the range, and there will be margin compression. This has the market moving lower despite the expectation for strength and a return to growth in the back half of the year. 

Institutions Nibble On La-Z-Boy 

The sell-side activity in LZB is mixed with the analysts giving up on the name and institutions buying it. The only analyst with a current rating is Hold, which is nearly 12 months old. The price target offers some upside, but who’s paying attention? The institutional activity has also been mixed and net-bearish on balance for the last 12 months. Institutional buying picked up in Q2, and they own almost all the stock. 

Institutional buying coincides with a bottom near current levels, but lower prices may come. The market is heading toward the bottom of a trading range that provides a more substantial target for support. If the market falls below the bottom of the range, it could move down to the pandemic lows, which is not expected now.