La-Z-Boy Incorporated

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

La-Z-Boy Incorporated is a leading manufacturer and retailer of furniture, primarily known for its reclining chairs and other upholstery products, with a focus on comfort, style, and quality.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

La-Z-Boy’s brand recognition is its main moat, with a long history of producing recliner chairs. They are the largest player in a concentrated industry with high operating margins. While the brand is valuable, its moat is not impenetrable.

Moat Analysis:

  • Moat Rating: 3/5
    • Brand Recognition: La-Z-Boy boasts strong brand recognition, particularly for its reclining chairs. This brand awareness provides some pricing power and customer loyalty.
      • While the brand name has positive equity, it is not impenetrable. There are numerous brands with more market share than La-Z-Boy such as Ashley Furniture HomeStore and Rooms to Go, etc.
    • Manufacturing Capacity: The company has multiple manufacturing plants worldwide, allowing them to respond rapidly to increasing demand. The company also owns its supply chain of raw materials, such as wood.
    • Distribution Network: La-Z-Boy’s vast distribution network, consisting of company-owned retail stores, e-commerce, and wholesale channels, allows it to connect with consumers through multiple channels. However this channel also allows for competitors to reach its users.
    • Cost Leadership: The company aims to be the low-cost producers, however a lot of raw materials are commoditized.
    • Switching Costs: There are very low switching costs for consumers as most furniture products don’t lock consumers into its ecosystem.

Legitimate Risks:

  • Macroeconomic Pressures: Consumer spending, especially on discretionary items like furniture, is highly susceptible to economic downturns and inflation. Increased interest rates can affect consumer behavior as well as reduce profitability of highly leveraged companies.
    • Recent trends show consumer spending is slowing and debt remains a concern
  • Competitive Pressures: The furniture industry has become more concentrated, increasing price competition and reducing profit margins. Competitors can offer cheaper products.
    • The increased price competition might result in higher sales volume for competitors in the long-term but also a reduction in margins for all.
  • Brand Erosion: While La-Z-Boy’s brand is valuable, it is also subject to erosion due to changing consumer preferences, new entrants, and negative press. New designs from competitors can disrupt their popularity.
  • Supply Chain Disruption: The company’s reliance on a global supply chain makes it vulnerable to unexpected disruptions that can increase costs, delay production, and affect its profitability. It may also be subject to higher cost producers, if its supplier fails to meet production needs.
    • Since the Russian invasion of Ukraine, the global furniture market is showing signs of a supply chain disruption and rising input costs.

Business Resilience:

  • Strong brand: La-Z-Boy has built brand loyalty over a long period of time, which can provide a basis to come back from tough times.
  • Distribution Network: This strong distribution network, which has been built for years, provides an effective channel to come back from hard times.
  • Management: Management has been effective in managing their supply chain and navigating difficult markets.
  • Financial health: The company is in a good financial position which means it can continue to innovate and survive during harsh periods.

Detailed Business Explanation:

  • Revenue Distribution: La-Z-Boy operates through two main segments:
    • Wholesale: Sells products to retailers, dealers, and other channels. This accounts for most of the revenue.
    • Retail: Operates company-owned retail stores, e-commerce operations, and licensed retailers.
    • The company has a global presence, with a strong presence in the United States, Mexico, Canada, and other countries.
  • Industry Trends:
    • The furniture industry is mature with relatively slow growth.
    • The market is competitive with many different players and relatively low margins.
    • E-commerce, despite being a smaller part of revenue for La-Z-Boy, is showing the most growth.
  • Margins: The company maintains decent margins, however these margins have seen some pressure recently.
  • Competitive Landscape: La-Z-Boy is a market leader in its niche, but faces tough competition from both smaller and larger players.
    • Competitors like Ashley Furniture HomeStore, Rooms To Go, and IKEA have significantly bigger revenues than La-Z-Boy. While many smaller local brands compete locally.
  • What Makes the Company Different: La-Z-Boy differentiates itself by focusing on comfort, quality, and well known reclining mechanism. Its iconic brand recognition has helped it gain market share over the years. Its vertically integrated supply chain provides more control over manufacturing and logistics.

Financials In-Depth:

  • Latest Reports are of Q3 2023
    • Revenue: Revenue was $584 million, a drop of 12.9% from 2022.
    • Earnings: The company reported net profit of $32.5 million, a significant decline from the $73 million profit in 2022.
    • Margins: Gross margin and operating margin were down for the quarter.
      • Operating margin is at 6.2%, while last year was 11.6%.
    • Backlog: Retail orders and their backlog remain low due to demand declines.
  • Balance Sheet:
    • Cash: $371 million, cash and equivalents is more than sufficient.
    • Total current assets were 1,267.1 million, while total current liabilities were 466.5 million. The company has a good quick ratio, meaning they can easily meet short-term liabilities.
    • Total debt stood at $476 million, 100% of it being long term debt. The company has a slightly high amount of leverage relative to its revenue. Overall the long term health of the balance sheet is decent.
  • Recent Concerns and Problems:
  • In the recent earnings calls, management noted the drop in revenue is attributed to a decline in demand. This is caused by a tough macro environment that has caused more people to be price conscious.
  • The company is focusing on promotions and discounts to increase demand, but at expense of margins. The company is trying to improve its mix to sell more premium products to improve margins.
  • The company is still trying to optimize its supply chain and reduce costs so it can remain profitable with reduced demand.
  • Management is seeing higher cost of raw materials and labor, while price increases are also not being fully passed onto customers due to falling demand. This will lead to reduced margins short term.

Understandability Rating: 2/5

  • The company sells and manufacturers furniture, which is easy to understand. However, due to the company’s mix of wholesale and retail sales and all the financial metrics it is a bit difficult to understand the company deeply. Most people would struggle to follow their balance sheet and derive their financial outlook.
  • I found that the company’s dependence on raw materials which are subject to market volatility makes understanding its cost structure a bit complicated.

Balance Sheet Health Rating: 4/5

  • The company has large reserves of cash.
  • It has a very healthy current ratio.
  • Debt levels are relatively high but does not yet pose a threat to the company.
  • The company may have to reduce debt if the economic situation worsens.