La-Z-Boy Preps For A Comfortable Fiscal 2022
La-Z-Boy NYSE: LZB has been vigorously executing initiatives that began even before the pandemic struck. Not only has the business been investing in its supply chain but it has also been expanding its capacity to meet robust demand. Demand sparked by the pandemic has yet to run out and it looks like it could be many more quarters before it does. We're talking several years of pent-up demand that has been unleashed and will be fueled by expanding homeownership, and personal upgrades over the next three to five years.
The company's fiscal Q1 report gave the market everything it could want and more including record revenue, better than consensus results, sizable backlogs, expanding capacity, and increased share buybacks. In our view, this company is as much a buy now as it ever was and it's still cheap trading it only 11X its earnings consensus.
La-Z-Boy Reports Record Results
La-Z-Boy reported record revenues for the third quarter in a row. The net consolidated revenue of $524.78 is up 83.8% over last year and beat the consensus by 800 basis points. On a two-year basis, we're talking 26% revenue growth so these are real gains and not just a trick of the numbers in comparison to last year's pandemically stricken results. These results also include one week of annual shutdowns the company uses to clean end prep its facilities so could have been even stronger.
On a segment basis, the larger wholesale portion of the business grew 76% over last year and 23% over 2019 while the slightly smaller retail portion of the business grew 100% from 2020 and 27% over 2019. On a written basis, written comps in the retail channels are up 22% and are up 10% across the network.
Moving down the report, the company experienced a significant widening of the operating margin but one that came in slightly below expectations. The GAAP operating margin increased to 6.5% from last year's 1.5% while the adjusted operating margin more than doubled from 3.1% to 6.6%. This drove earnings of $0.54 GAAP and $0.55 adjusted which both missed the consensus by a penny.
The Outlook Is Robust For La-Z-Boy
While the earnings were a little bit on the disappointing side they are still strong and mitigated by the guidance. The company is not giving formal guidance for revenue but expects recent pricing actions and internal cost controls to result in a significant widening of margins by year-end. We read this as revenue growth as well as earnings growth and at a rate above the analyst’s consensus.
The analysts are expecting the company to report flat sequential revenue in the second quarter of the fiscal year and we see upside risk in that assessment. The company has been expanding its capacity as well as investing in its supply chain ie stocking up on materials so we are expecting revenue to accelerate. The company has a “ significant” and growing backlog to work through so the extra capacity can be put to good use. The bad news, of course, is that La-Z-Boy is raising its prices to include a surcharge on its backlog which may curtail some consumer enthusiasm. We'll see.
La-Z-Boy Isn't Lazy About Capital Returns
La-Z-Boy is a great dividend stock despite it having cut the dividend last year. The cut was to ensure the company maintains its fortress balance sheet and it has since reinstated the dividend and increased it several times. The payout is now at a level above its pre-COVID distribution rate and we think heading higher. Based on the results, the outlook, the low 20% payout ratio, and the recent increase to the buyback plan we expect to see another dividend increase this fiscal year if not in the coming quarter. At recent prices, the stock is yielding about 1.75%.
The Technical Outlook: La-Z-Boy Is Testing Major Support
Price action in La-Z-Boy has been a little mixed in the wake of the report but we view the stock bullishly. The company offers a deep value and a very strong yield for dividend growth investors and is trading at a deep discount relative to itself as well. Shares are down about 25% from the recent highs and testing a major support zone that has been a key price level since 2017. We expect to see price action confirm support at this level and then begin moving higher. If not, La-Z-Boy could fall down to the $32 or $30 levels before it begins to regroup a move higher later in the year.
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