Leon’s Furniture (TSE: LNF) is a Canadian success story.
Founded in 1909 by Lebanese immigrant Ablan Leon, the company went public in 1969. Most shares of the furniture retailer remain held by the Leon family today.
Leon’s has spread its way from Southwestern Ontario to all 10 Canadian provinces, helped along by a C$700-million acquisition of rival firm The Brick in 2012. Along with integrating The Brick, Leon’s has undergone a digital transformation of sorts over the past decade, investing heavily in e-commerce and even an augmented reality shopping experience.
Nevertheless, while brick-and-mortar retailers have been under pressure in recent years from the rise of e-commerce, there remain certain advantages to in-person shopping, especially regarding furniture.
Getting to see the exact product you’re buying, along with its exact measurements, can give shoppers more security when purchasing expensive living room sets, for example. This benefits Leon’s, which has a vast array of physical locations.
With Canada undergoing a real estate surge, logic also dictates that many would-be home buyers might prefer to renovate and revamp their current living spaces.
While Leon’s impressive balance sheet and hefty income prospects are promising factors, increasing competition in a tricky industry are issues weighing on the stock, which has sunk by around 13% year-to-date.
Weighing that all into consideration, I am bullish on Leon’s.
Strong Management
Management handled its acquisition of The Brick well, making Leon’s the largest furniture, appliance, and electronics retailer in Canada.
Of the 306 retail locations across Canada owned by Leon’s, about two-thirds of them are under The Brick branding, especially in Western Canada.
Since most of the company’s shares are owned by the Leon family, management knows the industry very well, and it is likely to remain stable for the foreseeable future.
Leon’s released its Fiscal 2021 earnings at the end of February, with a record C$3.1 billion in system-wide sales, a year-over-year increase of 13.2%.
Other highlights for the year were a 27.5% growth in adjusted diluted earnings per share to C$2.60 and a 26.9% increase in net income to C$205.5 million.
Competition
Of the C$11.6 billion dollars spent on furniture in Canada in 2020, Leon’s took in $2.2 billion, a market share of about 18% in a very competitive space.
This is a slight drop from the 19% it earned in 2019, with Canadians spending C$11.85 billion on furniture that year.
Leon’s has to compete with massive online and brick-and-mortar retailers like Amazon (AMZN) and Walmart (WMT) while holding off smaller boutique options or specialty stores like Sleep Country Canada (TSE: ZZZ).
Dividend
Leon’s pays a quarterly dividend of C$0.16 per share, for a 3.1% forward dividend yield. When including the special dividend that was paid out last year, its dividend yielded near 9%. That is above the sector average in Consumer Goods of 1.5% by quite a bit.
The payout ratio of 72.5% is certainly elevated, though the company did report C$486.6 million in cash and investments on hand at the end of Fiscal Year 2021.
Given that Leon’s only spent C$210.6 million on dividends and buybacks through all of FY 2021, the current dividend should be safe going forward.
Insider Activity
Those within the company have enough reason to be optimistic regarding Leon’s fortunes, to the tune of spending C$147,300 on shares over the past three months.
We’re able to track insider buying and selling thanks to TipRanks’ Insider Trading tool, which shows us that the most recent selling action by an insider was done by Terrence Thomas Leon, the company’s vice chairman, all the way back in November.
However, that same insider bought C$42,500 worth of shares in March.
While it would never be prudent to invest based solely on one indicator, the fact that insiders are almost entirely buying into the company is generally a good sign.
Wall Street’s Take
Leon’s stock doesn’t have much of an analyst following.
The company has a Hold rating consensus on TipRanks, due to one Hold rating assigned.
That Hold rating – delivered by near-five-star analyst Stephen Macleod of BMO – does have a price target of C$28, which suggests 34.9% upside potential.
Conclusion
Vouching for a legacy brick-and-mortar retailer isn’t easy these days, but Leon’s has enough going for it that it’s worth looking into, especially given the stock’s performance over the last few months.
Management is “cautiously optimistic” going into FY 2022 due to uncertainties surrounding the Canadian economy, as the COVID-19 pandemic continues to disrupt supply chains and purchasing behavior.
It also remains to be seen how successful the company’s investments in modernizing its customers’ experiences will be over the long term. One investment, which uses augmented reality to allow shoppers to use their phones to “place” a piece of furniture in a room inside their homes, made its debut in the latter half of 2019.
This likely isn’t a stock that’s going to explode in value any time soon, but there are reasons to believe it belongs inside the portfolio of a patient, long-term investor.
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