La-Z-Boy Incorporated – Currently Listed as ‘LZB’ on the New York Stock Exchange

Free

Company Overview

La-Z-Boy Incorporated (“LZB”) is a global manufacturer/distributor of residential furniture including reclining chairs. The Company was birthed in 1927 as Floral City Furniture, being formed by Edward M. Knabusch and Edwin J. Shoemaker; in 1941 the Business was incorporated in the state of Michigan as La-Z-Boy Chair Company and in 1996 the company name was changed to the current name, La-Z-Boy Incorporated. Currently LZB has two reportable segments and several operating segments as explained directly below:

  • Wholesale Segment: This reportable segment consists of several economically similar operating segments which meet the criteria for determining reportable segments. La-Z-Boy, the Company’s England subsidiary, the Company’s casegoods operating segment that sells furniture under three brands (American Drew®, Hammary® and Kincaid®), and the international wholesale and manufacturing businesses. LZB has repeated the following description of this segment – “The Wholesale segment sells directly to La-Z-Boy Furniture Galleries® stores, operators of La-Z-Boy Comfort Studio® locations, England Custom Comfort Center locations, major dealers, and a wide cross-section of other independent retailers” [3, 5, 7, 9].
  • Retail Segment: This segment consists of the 177 company-owned La-Z-Boy Furniture Galleries® stores, primarily focussing on upholstered furniture, supplemented by some casegoods and other accessories.

The latest 10-Q had the following to say about the Company’s operations:

As of October 28, 2023, our supply chain operations included the following:

    • Five major manufacturing locations and 14 distribution centers in the United States and four facilities in Mexico to support our speed-to-market and customization strategy
    • A logistics company that distributes a portion of our products in the United States
    • A wholesale sales office that is responsible for distribution of our product in the United Kingdom and Ireland
    • An upholstery manufacturing business in the United Kingdom
    • A global trading company in Hong Kong which helps us manage our Asian supply chain by establishing and maintaining relationships with our Asian suppliers, as well as identifying efficiencies and savings opportunities. [3]

This Security Issue came to our attention at the price of approximately 28 during 2023, with drafting of this Piece beginning after. At the time it initially piqued our interest for several reasons, including:

  • The Company’s low P/E ratio
  • The Company’s low P/BV ratio
  • The Company’s ‘P/E * P/BV’ figure being less than 22.5
  • The Company’s current ratio
  • The Company’s earnings consistency and general increase
  • The Company’s cash dividend payments

Our Suspected Valuation at First Glance: Possibly ‘Gold’ or ‘Silver’

 

Company Financials

All of the discussions below are based on the data presented in the Company’s SEC filings [3 – 23].

Table 2 – 1 below shows the Company’s annual net income and diluted earnings per share, alongside their three-year averages:

Table 2 – 2 below shows data extracted from LZB’s most recently published SEC filing (10-Q) [3] regarding their balance sheet:

Using the information presented in the table above (Table 2 – 2) we have constructed a new table below (Table 2 – 3), consisting of the discernible tangibles which we here find more useful. We have included the values of these assets as stated on the balance sheet, alongside three liquidation values i.e., their ‘realizable value’ as presented in ‘Security Analysis’ (pg. 560) [1]:

Table 2 – 4 below shows how many of the Company’s relative assets and liabilities (as presented in Table 2 – 3) are attributable to each of the Company’s common shares:

 

Initial Discussions Regarding the Company’s Financials

The Issue’s current ratio is 1.71 in accordance with Table 2 – 3, and Table 2 – 4 above, whilst the best, average and worst-case scenarios are 1.52, 1.44 and 1.32 respectively, the first two of which are above the minimum recommended figure of 1.5 whilst the last two are below it. The Issue also passes the acid test in all four instances.

The Company has no long-term debt to have less than 110% of the net current asset value.

The Company has not demonstrated any losses over the last decade and it is our opinion that the earnings have been fairly consistent. We believe the five- and 10-year averages can be taken as a reliable indication of the Issue’s previous earning power as opposed to the by-product(s) of a random assortment of numbers.

The Company has an uninterrupted annual dividends streak going back to 2012.

The Company’s most recent annual earnings were larger than those of six years prior; and looking at the three-year averages of our diluted EPS (beginning 2014) we can see that over the latest fiscal decade, the EPS have increase by approximately 193%.

The discernible tangible equity per share is 2.09 in accordance with Table 2 – 4 above; and we calculate the best, average, and worst-case scenarios to be -2.39, -5.11 and -6.96, respectively. The current price of 35.65 is greater than 120% of the only positive value, with the rest being negative rendering the comparison invalid.

 

The following points are for the more-involved investor(s)/shareholder(s); those who view common stock holdings as part-ownerships in an enterprise, irrespective of the short term public valuations, and not merely a tradable certificate “which can be sold in a matter of minutes” [2]. All of the points presented below have been factored into our valuation of this Security Issue here discussed.

Further Discussions Regarding the Company’s Financials

There were three main points we felt warranted further discussion or highlighting here as opposed to a single bullet point under the ‘Additional Observations Regarding the Company’s Filings’ subsection. Here we shall remind the reader that it is up to them and anyone else to whom it may concern, to come to their own conclusions after carefully considering the information they encounter during their own investigative works. We felt that the following three points were to be highlighted but of course some of you may naturally disagree and in your perhaps more, or even less informed opinion may have a different take on the information presented.

Acquisitions

It is clear LZB utilizes an acquisition-type strategy for expansion, although not solely (at least by our current estimation). The following list of recent acquisitions supplied by the Business showcases what we are referring to and whilst some of the illustrated examples include assets of independent operators of the Company’s intellectual property as opposed to separately distinguished businesses, we believe the point still stands nonetheless:

  • “On August 15, 2018, and September 30, 2018, respectively, we acquired the assets of two independent operators of La-Z-Boy Furniture Galleries® stores: one that operated nine stores and two warehouses in Arizona and one that operated one store in Massachusetts, for an aggregate $42.8 million, including $38.9 million of cash, $2.6 million of forgiveness of accounts receivable, and $1.3 million of guaranteed future payments” [13].
  • “On July 30, 2018, we completed our acquisition of Stitch Industries, Inc. (‘Joybird’), an e-commerce retailer and manufacturer of upholstered furniture, for guaranteed cash payments of $75 million, which was subject to a working capital adjustment of $2.5 million which we received during the third quarter of fiscal 2019 from amounts placed in escrow at the time of the closing of the transaction” [13].
  • “On September 14, 2020, we completed our asset acquisition of the Seattle, Washington business that operated six independently owned La-Z-Boy Furniture Galleries® stores and one warehouse for $13.5 million, subject to customary adjustments. In the second quarter of fiscal 2021, a $2.0 million cash payment was made for the purchase with future guaranteed payments of $9.4 million to be paid over 36 months or fewer, with timing of payments dependent upon the achievement of sales thresholds defined in the purchase agreement” [9].
  • “On August 16, 2021, we completed our acquisition of the Long Island, New York business that operates three independently owned La-Z-Boy Furniture Galleries® stores for $4.5 million, subject to customary adjustments. In the second quarter of fiscal 2022, we paid $4.4 million of cash for the purchase of the Long Island, New York stores and assets” [7].
  • “On October 25, 2021, we completed the acquisition of Furnico Furniture Ltd (‘Furnico’), an upholstery manufacturing business in the U.K for approximately $13.3 million, subject to customary purchase price adjustments and in the third and fourth quarters of fiscal 2022, we paid total cash of $13.9 million for the purchase of the Furnico business. Furnico produces La-Z-Boy branded product for the La-Z-Boy U.K. business and also operates a wholesale business, selling white label products to key U.K. retailers” [7].
  • “On December 6, 2021, we completed our acquisition of the Alabama and Chattanooga, Tennessee businesses that operate four independently owned La-Z-Boy Furniture Galleries® stores in Alabama and one in Chattanooga, Tennessee, for $8.3 million, subject to customary purchase price adjustments. In the third quarter of fiscal 2022, we paid $8.0 million of cash for the purchase of the Alabama and Chattanooga, Tennessee stores and assets” [7].
  • “On July 18, 2022, we completed our acquisition of the Denver, Colorado business that operates five independently owned La-Z-Boy Furniture Galleries® stores and one distribution center for $10.1 million, subject to customary adjustments. We paid total cash of $7.7 million in the first and second quarters of fiscal 2023 and the remaining consideration includes forgiveness of accounts receivable and payments based on working capital adjustments” [5].
  • “On September 26, 2022, we completed our acquisition of the Spokane, Washington business that operates one independently owned La-Z-Boy Furniture Galleries® store and one distribution center for $4.7 million, subject to customary adjustments. We paid total cash of $4.0 million during the second quarter of fiscal 2023 and the remaining consideration includes forgiveness of accounts receivable and payments based on working capital adjustments” [5].
  • “On December 12, 2022, we completed our acquisition of the Barboursville, West Virginia business that operates one independently owned La-Z-Boy Furniture Galleries® store” [5].
  • “On March 20, 2023, we completed our acquisition of the Baton Rouge, Louisiana business that operates one independently owned La-Z-Boy Furniture Galleries® store and one distribution center for $5.0 million, subject to customary adjustments. We paid total cash of $4.9 million during the fourth quarter of fiscal 2023 and the remaining consideration includes forgiveness of accounts receivable and payments based on working capital adjustments” [5].

Positively, these: i) involved acquiring operations highly similar or completely identical to the Company’s core operations at the time; ii) did not involve LZB’s common shares as a consideration; and iii) judging by the consolidated statement of cash flow, no long-term debt has been accumulating to fund these. On the more negative leaning side (at least relative to our discussion points) some may highlight LZB has potentially hinged on business combinations for one of, if not, the largest year-over-year income increase in the latest financial decade, i.e.:

Sales increased $68.6 million in fiscal 2022 compared with fiscal 2021, primarily due to a $67.2 million, or 62% increase from Joybird, which contributed $176.4 million in sales in fiscal 2022. Of that increase, we estimate $3.8 million was attributable to the additional week in fiscal 2022 compared with fiscal 2021, based on the average weekly sales for the fourth quarter of fiscal 2022. The additional growth in Joybird sales was primarily driven by increased demand for products in the home furnishings category, investments in marketing and website enhancements resulting in higher online conversion, increased pricing and favorable product mix, and the addition of retail store locations. Further, sales in fiscal 2021 were negatively impacted by COVID-19, although to a lesser extent than our other retail businesses as Joybird primarily operates in the online, direct-to-consumer marketplace. Written sales for Joybird were up 27% in fiscal 2022 compared with fiscal 2021, driven by growth of the brand behind significant investments in marketing. [7]

Although as just referenced, COVID-19 was a factor for 2021 so the acquisition dependence for recent growth may be a moot point. Whilst we tend to prefer organic increases over the example in the paragraph above we are not completely intransigent so even if this has been the case in recent years, on account of the positive traits mentioned previously we would not be too displeased if this pattern continues. Although, as always it is up to each individual to decide on their own feelings towards the matter.

Recuring Non-Recurring Items

This Company has a lot of charges adding or subtracting to earnings with each one contributing to an ever-increasing potential distrust in the stability of the Business’s earning power. Paralleling the previous subsection we’re about to give another list of LZB’s supplied examples. This matter is a bit less clear-cut than the acquisition trend and whilst we have tried not to repeat items the sheer volume of them may mean some duplicates have slipped through on account of differing presentations and elaborations. We will continue nonetheless:

  • “A charge for a legal settlement of a civil dispute increased SG&A expense as a percentage of sales by 30 basis points. With the settlement, which resolved all of our past and future obligations at issue in the litigation, we recognized an additional charge of $4.1 million in the third quarter of fiscal 2018” [13].
  • “We recognized a non-cash pre-tax pension termination charge of $32.7 million during the fourth quarter of fiscal 2019. During the second quarter of fiscal 2020, we received a pre-tax refund of $1.9 million from the insurance company, representing an overpayment of the expected benefit obligations that were settled during the fourth quarter of fiscal 2019. Both the initial charge and the refund were recorded as pension termination refund (charge) in our consolidated statement of income” [9, 11].
  • “Other expense was $0.6 million higher in fiscal 2019 compared with fiscal 2018 and $0.9 million lower in fiscal 2018 compared with fiscal 2017, due to a $2.2 million gain on investments recorded in fiscal 2018 when our available-for-sale convertible debt security converted to preferred shares of a privately-held company” [13].
  • “Lastly, we recorded a $1.8 million insurance gain during fiscal 2018 following a fire in our England subsidiary’s corporate office building. We recognized a gain because the insurance proceeds exceeded the building’s net book value on the date of the fire” [13].
  • “These changes reduced our salary and office hourly vacation liability and resulted in a one-time non-cash gain of $5.1 million in our consolidated statement of income during fiscal 2019. Of the total $5.1 million gain recorded, $1.3 million was recorded in cost of sales with the remainder recorded in selling, general, and administrative expense” [13].
  • “During the second quarter of fiscal 2020, we invested an additional $0.5 million in one of these privately held start-up companies. Subsequently and during the third quarter of fiscal 2020, with respect to the same investee, we recorded an impairment charge of $6.0 million to other expense, net in the consolidated statement of income for the full carrying value as it was determined the value of the investment was not recoverable” [11].
  • “Based on our annual impairment testing, the carrying value of the Joybird reporting unit exceeded its relative fair value as of April 25, 2020, and we recorded a non-cash pre-tax impairment charge of $26.9 million during the fourth quarter of fiscal 2020 to reduce the carrying value of the goodwill to its fair value” [11].
  • “The sale of our Redlands facility, which resulted in a $9.7 million pre-tax gain, drove a 60 basis point improvement in SG&A expense as a percent of sales in fiscal 2020” [11].
  • “During the fourth quarter of fiscal 2020 we reversed the fair value of the Joybird contingent consideration liability by its full carrying value of $7.9 million pre-tax as, at that time, we no longer expected any additional consideration amounts would be owed related to the Joybird acquisition. Since the first quarter of fiscal 2021, Joybird has seen significant improvement in its operating results and, as a result, during fiscal 2021 we recognized a $14.1 million pre-tax charge to increase the fair value of the Joybird contingent consideration liability as, based on our most recent financial projections, we expect consideration will be owed under the terms of the earnout agreement” [9].
  • “In fiscal 2019 we recognized a one-time $3.8 million benefit due to changes to our employee vacation policies, the absence of which in fiscal 2020 resulted in a comparative 20 basis point increase in SG&A as a percent of sales” [11].
  • “Due to U.S. tariff exclusions issued in the fourth quarter of fiscal 2020 related to sewn fabric and leather sets and actuators imported from China, we recognized a one-time $16.3 million benefit in cost of sales for the rebate of previously paid tariff costs which resulted in a 100 basis point increase in gross margin” [11].
  • “Additionally, offsetting the increases was a $16.9 million decrease in bad debt expense, resulting in a 100 basis point decrease in SG&A as a percentage of sales. The higher bad debt expense in fiscal 2020 was primarily due to the write-off of receivables related to the bankruptcy proceedings of Art Van Furniture Group during the fourth quarter of fiscal 2020, along with an increased provision for credit losses due to uncertain economic conditions resulting from COVID-19” [9].
  • “During the fourth quarter of fiscal 2022, we recognized a $10.7 million gain on sale-leaseback transactions for the buildings and related fixed assets of three retail stores, resulting in a 50 basis point decrease in SG&A as a percentage of sales” [7].
  • “Other income (expense), net was $1.7 million of expense in fiscal 2022 compared with $9.5 million of income in fiscal 2021. The expense in fiscal 2022 was primarily due to unrealized losses on investments. The income in fiscal 2021 was primarily due to the benefit of $5.2 million of payroll tax credits resulting from the CARES Act along with unrealized gains on investments” [7].
  • “In the fourth quarter of fiscal 2023, we recognized an impairment of $10.3 million, consisting of $7.6 million in cost-basis investments and $2.7 million in convertible notes, which in total represents the full cost-basis value of the investment in one of these privately held start-up companies. The impairment loss is recognized in other income (expense), net, on the consolidated statement of income (refer to Note 20, Fair Value Measurement for additional information)” [5].
  • “Fiscal 2022 included a gain resulting from the sale of our Newton, Mississippi manufacturing facility while fiscal 2021 included expenses resulting from our business realignment plan. These actions resulted in a comparative 30 basis point decrease in SG&A as a percentage of sales in fiscal 2022” [7].
  • “Additionally, we recognized pre-tax gains of $0.8 million and $3.3 million in fiscal 2023 and fiscal 2022, respectively, to reduce the fair value of the Joybird contingent consideration liability based on our most recent projections at the time for the fiscal 2023 performance period. These actions resulted in a comparative $2.5 million increase in operating loss in fiscal 2023” [5].
  • “During the third quarter of fiscal 2023, we made the decision to close our manufacturing facility in Torreón, Mexico as part of our initiative to drive improved efficiencies through optimized staffing levels within our plants. As a result of this action, charges were recorded within the Wholesale segment in the third and fourth quarters of fiscal 2023, totaling $9.2 million in selling, general and administrative (‘SG&A’) expense for the impairment of various assets, primarily long-lived assets, and $1.6 million in cost of sales, primarily related to severance. During the first quarter of fiscal 2024, we terminated our lease on the Torreón facility and recognized a $1.2 million gain in SG&A expense within the Wholesale segment related to the settlement of our lease obligation on the previously impaired long-lived assets” [3].
  • “Charges related to the closure of our Torreón, Mexico manufacturing facility in fiscal 2023 resulted in a 40 basis point increase in SG&A as a percentage of sales” [5].
  • “Our Level 3 liability included our contingent consideration liability resulting from the Joybird acquisition. The fair value of our contingent consideration liability as of April 29, 2023 reflects our expectation that no additional consideration will be owed based on our most recent financial projections and the terms of the earnout agreement. As a result, during the second quarter of fiscal 2023, we reduced the fair value of the contingent consideration liability by its full carrying value of $0.8 million which was recorded as a favorable impact to selling, general and administrative expense in our consolidated statement of income” [5].
  • “During the second quarter of fiscal 2024, we announced further actions intended to drive efficiencies and optimize our manufacturing capacity in our global supply chain operations. As part of this initiative, we made the decision to shift upholstery production from our Ramos, Mexico operations to our other upholstery plants and relocate our cut and sew operations back to Ramos, Mexico, resulting in the permanent closure of our leased cut and sew facility in Parras, Mexico. As a result of these actions, charges were recorded within the Wholesale segment in the second quarter of fiscal 2024, totaling $3.6 million in cost of sales, primarily related to severance, and $3.0 million in SG&A expense for the accelerated depreciation of fixed assets” [3].

Shares Authorized, Issued and Outstanding

This could have been a bullet point in the ‘Additional Observations Regarding the Company’s Filings’ subsection but there were a few matters to highlight, so we chose to distinguish this entire point overall:

  • Firstly there are a large number of shares authorized and possibly facilitating excessive equity dilution in the not-too-distant future, so it would be nice if some assurance was given that this will not happen any time soon.
  • Secondly, LZB repurchases their own common shares and there is a lack of clarification about what happens to them. The consolidated statement of changes in equity includes these but lacks mention of their cancellation, an occurring event we’ve presumed is happening as there is no mention of treasury shares on neither the equity statement nor the consolidated balance sheet which then brings us to our penultimate point.
  • Thirdly, the quantity of issued common shares is not stated on the balance sheet which only states the number of shares outstanding and because of this we have been forced to use the outstanding shares for our valuations which is typically not the preferred route but evidently we were not left with much choice.
  • Finally, related to these matters is the equity compensation plan information for fiscal 2023 which seems to be missing entirely. We do not know where this information was reported but as it was missing from both the relevant 10-K Form, and DEF 14A Form, we have had to use the values for the prior year when calculating our diluted EPS for the sake of our Valuation(s).

Additional Observations Regarding the Company’s Filings

Points we feel may be considered neither positive nor negative

  1. The Company may have recently completed a business cycle expansion.
  2. The Company is overly conservatively capitalized thus would not make for an interesting speculative purchase in this regard.
  3. We do not here suspect any corporate pyramiding.
  4. Concerning the principles of consolidation – Exhibition Number 21 listed 21 subsidiaries, three of which have a percentage next to them in brackets presumably indication the percentage of ownership/control LZB has in said subsidiary i.e.: ‘ELK Air Partners III, LLC (60%)’; ‘La-Z-Boy (Thailand) Ltd. (51.05%)’; and ‘La-Z-Boy Asia Co., Ltd. (57.2%)’. Based on this, it does not appear that there are any other consolidation concerns as it pertains to say a liquidation type-event, as we do not believe these subsidiaries to be the most significant although that is indeed an assumption and we think confirmation of this should perhaps be sought after with Management. The consolidated income attributable to the Noncontrolling interests is also quite small, another reason we don’t believe these concerns should be too prodigious. We have assumed that all of the other listed subsidiaries are fully consolidated.
  5. The depreciation and amortization charges are not delineated on the income statement but every 10-K Filing’s description of the ‘cost of sales’ refers to inclusion of the depreciation expenses that related to LZB’s manufacturing facilities and equipment. The depreciation expenses are calculated “principally using straight-line methods over the estimated useful lives of the assets” [5, 7, 9, 11, 13, 15, 17, 19, 21, 23, 25, 27], with the use of the word “principally” leading us to wonder if another method is used. The estimated useful lifetimes of the assets are provided as ranges instead of fixed values (we prefer the latter), and are outlined as follows:
    1. ‘Buildings and building fixtures’ is 3-30 years as of the 2022 10-K Filing, prior to which it was 3-40 years.
    2. ‘Machinery and equipment’ is 3-20 years as of the 2022 10-K Filing, prior to which it was 3-15 years as of the 2013 10-K Filing, prior to which it was 3-20 years.
    3. ‘Information systems, hardware and software’ is 3-15 years as of the 2022 10-K Filing, prior to which ‘Information systems and software’ was 3-7 years as of the 2020 10-K Filing, prior to which it was 3-10 years.
    4. ‘Furniture and fixtures’ is 3-10 years as of the 2022 10-K Filing, prior to which it was 3-15 years as of the 2014 10-K Filing, prior to which it was 3-20 years.
    5. ‘Land improvements’ is 3-30 years.
    6. ‘Transportation equipment’ is 3-6 years as of the 2022 10-K Filing, prior to which it was 3-10 years.
  6. There was one stock split in 1998 [28], but we have not witnessed observable stock dilution.
  7. The Company’s comprehensive income typically consistently approximates to the net income.
  8. Every year the Company says “inventories are stated at the lower of cost or market” [5, 7, 9, 11, 13, 15, 17, 19, 21, 23, 25, 27] with the cost being determined using the last-in, first-out (“LIFO”) basis for most of the inventory, with the remainder being determined on a first-in, first-out (“FIFO”) basis. In recent the years the Company has maintained “the majority of our La-Z-Boy Wholesale segment inventory uses the LIFO method of accounting, while the FIFO method is used primarily in our Retail segment and Joybird business” [5, 7, 9].
  9. The latest balance sheet had both “other current assets” and “other long-term assets” in the latest balance sheet and whilst there was some mention of assets listed in these items, a full comprehensive breakdown lacked any presence.
  10. LZB’s effective tax rates are typically marginally higher than the statutory corporate rates in the U.S.
  11. As of the latest 10-K Filing’s date, the Company had the following deferred tax assets associated with loss carry forwards and the affiliated expiration: Federal net operating losses ($530,000 worth expiring in Fiscal 2039); Various U.S. state net operating losses, excluding federal tax effect ($2,074,000 worth expiring in Fiscal 2024 – 2038); Foreign capital losses ($147,000 worth which are indefinite); and Foreign net operating losses ($131,000 worth which are indefinite).
  12. We could not identify any large or concerning payments due in a year etc.
  13. There has been no recent notable decline in the value of assets (current or total) that in our opinion warrants any notable concern.
  14. The Company is a “large accelerated filer” in Rule 12b-2 of the Exchange Act and has been since the 2013 10-K Filing, before which LZB was an “accelerated filer”.
  15. In the latest 10-K Filing there were two critical audit matters, ‘Accrued Product Warranties for the Wholesale Reportable Segment’ and ‘Goodwill Impairment Assessment – Joybird Reporting Unit’, the former of which has been a critical audit matter for the last three annual reports and the latter of which was last a critical audit matter in 2020.

Points we feel may be considered negative

  1. The Company reported a net loss for both fiscal 2008 and 2009.
  2. The Company’s capital expenditures frequently fall outside of the values of the range predicted the year before.
  3. There is a very high institutional ownership percentage of the common shares outstanding (77.42% at the time of this Piece’s posting [29]).
  4. Every 10-K Filing contains a paragraph from the Company saying that they are involved in various legal proceedings arising in the ordinary course of their business and they “have been named as a defendant in various lawsuits arising in the ordinary course of business and as a potentially responsible party at certain environmental clean-up sites” [5, 7, 9, 11, 13, 15, 17, 19, 21, 23, 25, 27]. Full details are never provided, however.
  5. We experienced a few unfavourable observations concerning Management:
    1. The Company makes use of non-GAAP metrics when determining NEO compensation including relative total shareholder return (“rTSR”).
    2. There has been some usage of the company aircraft for personal business.

Points we feel may be considered positive

  1. We would say the operations of the Company are relatively easy for the layman to comprehend.
  2. The Company has been around for a number of decades thus has stood the test of time.
  3. There is currently no reliance on a small number of customers for revenue and typically the same applies to the Company’s suppliers, for their stock.
  4. We would say this is a relatively large company in terms of consolidated financials.
  5. Over the last fiscal decade there have been more year-over-year increases in cash and cash equivalents than there have been decreases although one was blatantly owed to loan proceeds.
  6. There is currently no long-term debt on the consolidated balance sheet.
  7. Year-after-year there are no related person transactions for the Company to disclose or report on.

Possible Questions for LZB’s Approximate 1,633 Stockholders to Consider, Investigate and/or Raise with Management

  1. The 2020 10-K Filing said “Art Van Furniture Group filed for bankruptcy and has begun Chapter 7 liquidation during the fourth quarter of fiscal 2020” [11]. Is this a trend expected to continue into the future? Was this incident anticipated?
  2. The 2022 annual report mentioned that Fiscal 2022 included a gain resulting from the sale of the Company’s Newton, Mississippi manufacturing facility. Can more details on this transaction be provided and can they always be provided for these types of transactions?
  3. Are all of the subsidiaries listed on Exhibition Number 21 on the latest 10-K Filing wholly-owned and for the ones with percentages in brackets next to them, how significant are they to the Company’s operations in terms of consolidated balance sheet values and consolidated earning power?
  4. Why were there no dividends paid to the minority interest joint venture partners in fiscal 2023, unlike the previous years? Is there a problem?
  5. If there are acquisitions or business combinations, can the Company always say how they were financed i.e., cash on hand, loan proceeds, debt issuance, issuance/selling of equity/common shares etc.?
  6. The Company often said they are involved in various claims and lawsuits arising in the normal course of business. Is there a minimum estimated legal or settlement cost at which it is decided that the details of these will be provided to shareholders? And can examples of these claims and lawsuits be provided as they occur?
  7. Can the balance sheet and consolidated statement of changes in equity always state the number of shares issued?
  8. What does the Company do with the repurchased shares and can this always be explained?
  9. Why have such a large number of shares been authorized? Can any reassurance be provided that these will not eventually dilute Shareholder equity in the near-term future?
  10. Where is the equity compensation plan information for fiscal 2023 which seems to be missing entirely?
  11. Going forward can a full compressive breakdown of all ‘other’ assets (current and/or non-current) be provided in all 10-K and 10-Q Filings?
  12. Why did the Company recently remove the table that outlined their contractual obligations of the types specified?
  13. When discussing the calculation of the deprecation of the Company’s assets, LZB say this is done “principally using straight-line methods over the estimated useful lives of the assets” [5, 7, 9, 11, 13, 15, 17, 19, 21, 23, 25, 27]. On account of the word “principally” are any other methods used?
  14. Why have so many of the estimated useful lifetimes of the Company’s assets been changed over the years?
  15. Can exact estimated useful lives of the depreciated assets be provided as opposed to ranges?
  16. Can the Company not afford to pay more in cash dividends to Shareholders on a more consistent basis?
  17. The Company often mentions Shareholder engagement. Is there any mention of how they reach out to the individual shareholder, and if they do not, why not?
  18. Why are the DEF 14As roughly as long as the 10-Ks in terms of enumerated page length? Can they be shortened going forward?
  19. Is any Director or NEO a company founder, co-founder, or descendant of such?

 

Valuations

The price of this Security Issue at the time of this Piece’s publication is 35.65. Using our most recent three-year average of the diluted EPS (2.78) as opposed to the most recent EPS figure (3.13) increased the P/E ratio from 11.38 to 12.84; and using our discernible tangible equity value per share (2.09) as opposed to the stated book value per share (20.24, in accordance with Table 2 – 2) has increased the P/BV ratio from 1.76 to 17.02. With that in mind and considering current federal interest rates (5.5% at the time of writing), the current price does not appear to offer a sufficient margin of safety as per Benjamin Graham’s concept i.e., “over a ten-year period the typical excess of stock earning power over bond interest may aggregate 50% of the price paid” [2]. We should now also remind the reader of some of Graham’s other thoughts regarding the ‘margin of safety’ principle, viz.:

Diversification is an established tenet of conservative investment. By accepting it so universally, investors are really demonstrating their acceptance of the margin-of-safety principle, to which diversification is the companion…It is our argument that a sufficiently low price can turn a security of mediocre quality into a sound investment opportunity provided that the buyer is informed and experienced and that he practices adequate diversification. [2]

Taking our most recent three-year average value of 2.78 for diluted EPS and our stated discernible tangible equity value per share of 2.09, and multiplying the corresponding P/E and P/BV ratios of 12.84 and 17.01 respectively, we get a figure of 218.58, which is above Graham’s recommended upper-limit of 22.5 (which in this instance would corroborate with a share price of approximately 11.44.

Finally, we can make the following conclusions regarding the original points that initially piqued our interest in the Issue, considering both our adjustments:

  • The Company’s low P/E ratio – still valid
  • The Company’s low P/BV ratio – no longer valid
  • The Company’s ‘P/E * P/BV’ figure being less than 22.5 – no longer valid
  • The Company’s current ratio – still somewhat valid
  • The Company’s earnings consistency and general increase – still valid
  • The Company’s cash dividend payments – still valid

Whether the current price is reflective of the Company’s future, present and past, in the reader’s opinion is for the reader to decide based upon their own research, however in our opinion this Security Issue appears currently overvalued on account of its current and previous quantitative showing.

Our Valuation: Rubber

This Security Issue did not do bad in our ‘Initial Discussions Regarding the Company’s Financials’ section, and the topics for further discussion were far from terrible, although stability and clarification would be ideal for the penultimate and final matters respectively. The main reason for the low valuation is the current pricing point, particularly relative to the net tangible assets. For this Security Issue to have reached the next highest valuation of ‘Plastic’ it would likely have had to come in at an approximate pricing point of 24-30.

At this point in time and all matters here considered, this is a stock pick we would likely follow and would give some consideration towards adding to a stock portfolio given the correct price.

 

References

  1. Graham, B., Dodd, D.L., Security Analysis, (6th edition), (Warren, B.E., Klarman, S.A., Grant, J., Laderman, J.M., Lowenstein, R., Marks, H.S., Merkin, J.E., Berkowitz, B., Greenberg, G.H., Greenwald, B., Abrams, D), McGraw-Hill Education, 2008 – {ISBN 10: 0071592539/ISBN 13: 9780071592536 & ISBN-13: 978-0071592536/ISBN-10: 0071592539}
  2. Graham, B., The Intelligent Investor, (Revised Subsequent Edition), (Warren, B.E., Zweig, J), Harper Business, 2006 – {ISBN-10: 9780060555665 / ISBN-13: 978-0060555665}
  3. LZB’s 2nd 2024 quarterly fiscal report (10-Q) – https://www.sec.gov/Archives/edgar/data/57131/000005713123000152/lzb-20231028.htm
  4. LZB’s 2023 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/57131/000005713123000106/lzb-20230718.htm
  5. LZB’s 2023 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/57131/000005713123000032/lzb-20230429.htm
  6. LZB’s 2022 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/57131/000005713122000067/lzb2022def14a.htm
  7. LZB’s 2022 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/57131/000005713122000031/lzb-20220430.htm
  8. LZB’s 2021 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/57131/000005713121000084/lzb2021def14a.htm
  9. LZB’s 2021 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/57131/000005713121000049/lzb-20210424.htm
  10. LZB’s 2020 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/57131/000005713120000054/lzb2020def14a.htm
  11. LZB’s 2020 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/57131/000005713120000035/lzb-20200425x10k.htm
  12. LZB’s 2019 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/57131/000120677419002027/lzb3552651-def14a.htm
  13. LZB’s 2019 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/57131/000104746919003700/a2239055z10-k.htm
  14. LZB’s 2018 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/57131/000120677418001996/lazboy3377941-def14a.htm
  15. LZB’s 2018 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/57131/000110465918041060/a18-13038_110k.htm
  16. LZB’s 2017 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/57131/000120677417002033/laz3265271-def14a.htm
  17. LZB’s 2017 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/57131/000104746917004131/a2232472z10-k.htm
  18. LZB’s 2016 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/57131/000120677416006378/lazboy3058331_23-def14a.htm
  19. LZB’s 2016 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/57131/000104746916013932/a2228987z10-k.htm
  20. LZB’s 2015 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/57131/000120677415002136/lazboyinc_def14a.htm
  21. LZB’s 2015 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/57131/000104746915005489/a2225114z10-k.htm
  22. LZB’s 2014 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/57131/000114036114028060/formdef14a.htm
  23. LZB’s 2014 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/57131/000114036114025965/form10k.htm
  24. LZB’s 2013 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/57131/000114036113027682/def14a.htm
  25. LZB’s 2013 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/57131/000114036113025602/form10k.htm
  26. LZB’s 2012 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/57131/000114420412038666/v317770_def14a.htm
  27. LZB’s 2012 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/57131/000114420412035439/v314673_10k.htm
  28. https://www.stocksplithistory.com/?symbol=lzb
  29. https://www.gurufocus.com/stock/LZB/ownership

 

Throughout this Piece, any mention of a given year’s annual report refers to the 10-K Filing/Annual Report which represents the financial year ended that same year, typically in the calendar month of April, i.e., any mention of the ‘2019 10-K Filing’ or ‘2019 Annual Report’ etc. refers to the 10-K Filing representing the fiscal year ended April 2019. The Filings are usually published a few months later, that same calendar year.

Throughout this Piece, any mention of a given year’s Proxy Statement refers to the DEF 14A Form/Proxy Statement which accompanied the most recent 10-K Filing, i.e., any mention of the ‘2019 Proxy Statement’ refers to the DEF 14A Form which accompanied the 2019 10-K Filing; usually published not too soon after the 10-K Filing (typically the following calendar month(s) relative to the 10-K Filing’s filing date).

 

Disclaimers and Disclosures – https://wp.me/PcbS4Q-V