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La-Z-Boy Moves to Shake Image of Firm That Needs More Energy

Posted on: Sunday, 29 January 2006, 15:00 CST

By Jon Chavez, The Blade, Toledo, Ohio

Jan. 29--MONROE - Over the last few years, La-Z-Boy Inc. shareholders might have felt that the stock was behaving too much like the company's name.

Steady sales and dividends in the past five years haven't been enough to lift a sagging stock price.

Management maintains that its decisions the past two years, such as plant closings and sharply higher imports of wood furniture, are starting to pay off. Industry analysts have been softly critical, and some have taken a wait-and-see approach.

Mathew Emmert, an investment adviser for the Web investing site Motley Fool, said La-Z-Boy was hurt by cheap imports of wood furniture for years before it finally decided to reduce its U.S. production and import more itself.

"Very few people saw what was happening before it happened, but many more companies reacted more quickly that La-Z-Boy did," he said. "Instead of acting aggressively, they nibbled at the company's cost structure."

Although the Michigan firm has problems that are evident throughout the furniture industry, other difficulties are La-Z-Boy's own doing.

Its 2000 acquisition of several companies left it heavily invested in domestic wood furniture production, so it wasn't as quick to move to switch to more imports, which grew 50 percent in the early part of the decade.

Mark Stegeman, La-Z-Boy's treasurer, said the company should have acted more rapidly to increase importing.

"It's pretty hard when you have just bought all this stuff to then turn around and tell your board, 'By the way, everything we just bought at a premium we now have to close' " he said.

Since 2003, under new chief executive Kurt Darrow, the Monroe company has closed 20 of 23 wood-furniture plants and reduced its workforce to just under 14,000 from 21,000.

It imports nearly 80 percent of its wood furniture from China, Mr. Stegeman said.

"It's true that we needed to move quicker on that," he said. "We were priced a little too high. But since then, you could see improvement on our costs and sales."

Sales at La-Z-Boy, the nation's No. 2 furniture maker, have fluctuated since 2000. They hit $2.25 billion in 2001, the result of acquisitions. But by 2005, they were down to $2.05 billion.

The company hasn't been helped in the past five years by the closing or bankruptcy of several larger retailers that carried its product, such as Montgomery Ward and HeiligMeyers.

Also, competitors began opening stores and supplying furniture to big discount stores, such as Costco Wholesale Corp. and Wal-Mart Stores Inc.

Last year, when profit was $37 million, was the first year since 2000 that earnings didn't decline.

In 2004, the company posted a loss of nearly $5.8 million, its first annual loss in three decades.

The company's stock has been mired well below $20 a share for 18 months. The share price began a steady climb in 2000 and reached $30.88 in April, 2002. But it has retreated since, dropping to a five-year low of $10.67 on Oct. 5. It closed Friday at $16.10.

Laura Champine, an analyst with Morgan Keegan & Co., said it is too soon to say whether the firm has turned a corner.

But she said La-Z-Boy's financial fortunes have improved greatly since last fall when it was plagued by short-term cost increases and an industry-wide shortage of foam needed to make furniture.

Profits will be difficult to achieve for the next few quarters, Ms. Champine said. But the company is in a good position because it is bringing its costs down at a time when the baby boom generation, a key part of its customer base, is entering a peak spending period, she said.

The firm hoped its restructuring, including plant closings and layoffs, would begin to pay off last year.

In the first quarter, which ended at the end of July, it made a $3.2 million profit. But in the second quarter, which ended Oct. 29, it had a $6.4 million loss and sales plummeted 13 percent. The company attributed the poor performance to the foam shortage, the costs of closing a plant, and lower-than-expected sales.

The company warned that the foam problem could be a drag on its profits as its factories work overtime to fill orders they couldn't meet last fall.

But La-Z-Boy's leaner look seems to be having a positive effect. Its second quarter, although it produced a loss, was better than expected, causing its stock to close up $1.31 the next day and at one point reach $13.75 a share - its biggest one-day gain in more than six years.

For its fiscal third quarter, which ends Tuesday, La-Z-Boy is estimating its earnings will be 13 to 17 cents per share. The company does not provide yearly earnings guidance, but analysts covering La-Z-Boy are estimating its earnings in fiscal 2006, which ends in April, will be about 49 cents per share.

Budd Bugatch, an analyst at Raymond James & Associates, said the Fortune 1,000 firm's moves have so impressed him that he has reinitiated formal coverage.

"I didn't feel there were any reasons to cover them before," he said. "Now, they are worth covering."

Raymond James' recent analysis on La-Z-Boy gave the stock a "strong buy" rating and a 12-month target price of $16 a share. It said it had a "more positive view about management's direction, energy, and La-Z-Boy's intermediate-term prospects."

But the company still has a way to go, and some analysts feel it could still do more to re-energize its brand name, even though a 2003 Home Furnishings News survey lists it as the third-most-recognizable brand in home furnishings retailing.

Mr. Emmert, 32, of Motley Fool, said he and his wife recently shopped for furniture to fill their new house, "and among the slew of ads we would receive from all these competing providers, rarely did I see a La-Z-Boy ad."

"They're not leading me to the company" he said. People have to stumble across the products, which aren't selling briskly, he said.

For its part, the company tried to gain notice among younger buyers through its Todd Oldham collection - a line of furniture created by the chic fahion designer - and through a marketing campaign emphasizing the company's "new look of comfort."

It also redesigned its Web site to let shoppers choose styles and colors, and promotes its products on the TV shows popular with younger viewers, like ABC's Lost.

In a major licensing deal signed last April, La-Z-Boy Inc. chose NorthPole Ltd., a maker of tents and sleeping bags, to design, manufacture, and market tents, sleeping bags, air mattresses, portable beds, hammocks, and collapsible chairs to be available this spring at major retailers like Target, Home Depot, Sam's Club, and Sears. All the products will bear the La-Z-Boy name

"We're looking at other alternative avenues for retailing. And surveys show that over 30 percent of our customers do research first on our Web site," Mr. Stegeman said. "We know we've got to think broader than just traditional retailing because times are changing. …"

But Ms. Champine said the company name is not connecting with younger buyers. The Todd Oldham line, she said, "is not what I would call ideal for La-Z-Boy stores."

The company recently opened a Todd Oldham by La-Z-Boy store in New York, selling only the Oldham collection.

The firm's primary focus is converting its La-Z-Boy Furniture Gallerie stores to a format featuring rooms of furniture rather than rows of recliners. So far, 127 of its 329 stores have been converted.

The furniture maker needs to consider how to get its products into stores like Target and Wal-Mart, because that is where young people tend to shop, said Mr. Emmert, of Motley Fool. "They need to get the product to where the people are," he said.

Still, the company must keep its "recliner" image alive for an older generation yet create a separate image for young people who think the firm only sells stodgy recliners, said Jerry Epperson, managing director of Mann, Armisted, and Epperson in Richmond, Va.

Mr. Emmert said La-Z-Boy's famous recliner "is the most duct-taped product in history."

But, he added, "The reality is they have a full line of furnishings. It's hard to say they shouldn't be doing better given their well-known brand name."

Contact Jon Chavez at: jchavez@theblade.com or 419-724-6128.

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Copyright (c) 2006, The Blade, Toledo, Ohio

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Source: The Blade

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