La-Z-Boy Reclines To More Comfortable Levels

Key Points

• La-Z-Boy is reclining into a more comfortable position to put new money to work. 
• Q2 earnings were much better than expected. 
• Q3 guidance is weak but due to near-term headwinds that should abate over time. 

La-Z-Boy (NYSE: LZB) shares are reclining into a more comfortable price range following the Q2 earnings release and guidance but this is an opportunity for investors. The decline in share prices is driven by a cautious outlook for the 3rd quarter that does little to offset the value, quality or yield of the dividend. Considering the stock is already down 50% from its COVID-induced highs and bouncing from a long-term support level there are technical reasons to be interested in this stock as well. The takeaway is that near-term price action may display some volatility but ultimately it should move to the side and provide at least one good entry point over the next few months to 2 quarters. 

La-Z-Boy Has Record Quarter, Raises Dividend 10% 

La-Z-Boy had a very strong quarter that is only marred by the near-term outlook for business activity. The company’s $611 million in revenue is up 6.1% versus last year, a company record and it beat the consensus estimate by 220 basis points. The strength was driven by growth in both the wholesale and retail segments of business with retail leading with a gain of 31% over last year. One of the few negative details in the quarterly results is that unit volume declined but was offset by pricing, mix and channel strength. 

The quarterly earnings were good as well. The company reported a 70 basis point improvement in the GAAP operating margin and a 100 basis point improvement in the adjusted operating margin which drove quarterly earnings to a record high as well. The adjusted $1.05, which was aided by a 2.8% reduction in share count, is up 24% versus last year and beat the consensus estimate by 23%. Free cash flow came in negative but that is due to capital expenditures that are helping to improve profitability. The CAPEX will recede over time but profitability should remain. Turning to the balance sheet, cash is down YOY but still ample and there is no debt. 

The truly bad news is the guidance but, again, this is a near-term headwind that will not impact the dividend payment. The company is expecting revenue to fall on a YOY basis and miss the consensus target by fair margin due to developing trends. The company’s written sales declined by 5% during the Q2 period which is a primary driver of sales in the following quarter. The other bad news is that backlogs are declining so there is no tailwind from that direction. As for the dividend, the company just raised the payout by 10% and is still paying out less than 20% of its annual earnings expectations. At the current rate and with the drop in share prices the yield is pushing 2.75% and it only costs about 8.5X earnings. 

The Institutional Tide Shifted For La-Z-Boy 

The institutions were selling La-Z-Boy early in 2022 but that changed mid-year. Since then, the institutions have been net buyers of the stock and have their ownership up to over 95%. This is a telling figure that shows a high level of confidence in the company’s payout but it should be monitored. The Q3 guidance may give reason to rotate into other furniture stocks like Haverty Furniture Company (NYSE: HVT) and Ethan Allen (NYSE: ETD) which pay much higher yields that come with equally attractive fundamentals. 

The chart of La-Z-Boy shows a stock that has hit bottom but one that may retest the bottom. The post-release action has the stock down more than 3.5% in premarket trading and showing resistance near $27.50. If the market can not regain its footing at this level, it could fall to the 30-day moving average or lower. Longer-term, La-Z-Boy should continue to bottom within the current range although it may move sideways for a few quarters before it starts moving higher again.