Leon’s Furniture Ltd. Is an Outperformer You Can Count on

Leon’s Furniture Ltd. (TSX:LNF) has plenty of room to improve margins and continue rewarding shareholders.

The Motley Fool

Over the past 50 years Leon’s Furniture Ltd. (TSX:LNF) has grown to become Canada’s largest retailer of home furnishings, appliances, and electronics. It owns over 300 retail locations under various banners serving the public. It’s also the largest commercial retailer to builders, developers, hotels, and property management companies.

While the business seems rather boring from the outside, the company has grown dividends by 11% annually since the first decade, with an average return on equity of over 16%. What’s made this company so successful, and can investors count on a future with similar returns?

Management has significant skin in the game

The management team and directors control roughly 67% of the total outstanding shares. This level of ownership, while seemingly risky to minority shareholders, has allowed Leon’s shares to dramatically outperform the market over the long term due to management incentive to grow shareholder value. Over the past 15 years, Leon’s stock is up 270% versus only a 115% advance for the TSX.

Acquisition clears room for growth

In 2013, Leon’s bought out their largest competitor, The Brick Ltd., in a $700 million deal. The deal provided access to national buying opportunities in merchandising and marketing and a national distribution network that will improve their online shopping capabilities.

Since eliminating its largest domestic competitor, Leon’s has focused on integrating the new businesses. Because The Brick Ltd. was less efficient with their costs, Leon’s SG&A spending jumped from 32.7% of revenues to 37% after the deal. If the company can streamline its acquisition to its former level, it would result in over $100 million in savings.

Leon’s also has reduced a significant amount of the debt involved in the acquisition. In the past two years, the debt has been reduced by $125 million down to $310 million. With an improved financial position, synergy opportunities, and less direct competitors, Leon’s is in a healthy position.

Respectable growth targets with a low valuation and volatility

Management has noted that it expects EPS to grow at 5-10% over the long term. In 2016 analysts are expected earnings to grow 8.7%, reaching $1.12 a share.

At that level, shares would only be trading at 14.2 times earnings. This results in a 7% earnings yield on a company that has demonstrated less volatility than the TSX overall during periods of turbulence. In fact, shares have a beta of only 0.2 times that of the market.

Buy and hold for the long term

Year-to-date, shares are actually down 11% versus a market return of negative 2%. With a reasonable valuation, a 2.5% dividend, and a history of long-term success, Leon’s Furniture is a great buy-and-hold investment.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ryan Vanzo has no position in any stocks mentioned.

More on Investing

edit Taxes CRA

Passive-Income Power: How to Make $100/Week TAX FREE!

Canadians hungry for more cash in an inflationary environment can churn out passive income with stocks like BTB REIT (TSX:BTB.UN).

Read more »

Growth from coins
Stocks for Beginners

3 Incredibly Cheap Canadian Growth Stocks to Buy Today

Canadian growth stocks are cheaper than they have been in a long time. Here are three stocks that are incredible…

Read more »

Stock analysts were once excited about construction company Aecon as an investment.

Bull or Bear: Why Analysts Changed Their Tune on Aecon Stock

Analysts had been champing at the bit for the construction company, but the tides have turned.

Read more »

Specialty Brands faces higher raw materials costs.
Dividend Stocks

What’s Next for Premium Brands Stock?

Shares of the specialty food production and distribution company have fallen about 25% since last October.

Read more »

Double exposure of a businessman and stairs - Business Success Concept
Dividend Stocks

2 Interesting Buys in Any Market

Here are two intriguing buys in any market climate that offer defensive appeal as well as growth and income earning…

Read more »

Bank sign on traditional europe building facade
Bank Stocks

Should You Buy Bank Stocks Now?

Canadian bank stocks are getting cheap. Is this the right time to buy?

Read more »

stock data
Stocks for Beginners

2 Reliable Stocks Beginners Can Buy Amid the Market Selloff

As the broader market turmoil continues, new investors can buy these two reliable dividend stocks to get good returns on…

Read more »

Biotech stocks can be good yet risky investments.

Is Bellus Health Stock Still a Buy After 30% Earnings Jump?

The biotech continues to make progress on obtaining FDA approval for its chronic-cough therapy.

Read more »