La-Z-Boy Shows Strong Execution, But Has Balanced Risk-Reward, KeyBanc Says In Downgrade

La-Z-Boy Inc. (NYSE: LZB) shares surged 13 percent after the company reported better-than-expected first-quarter results Tuesday. 

The Analyst

KeyBanc Capital Markets analyst Bradley B. Thomas downgraded La-Z-Boy from Overweight to Sector Weight.

The Thesis

Based on its strong first-quarter results and the recent acquisition of Joybird, LZB is well-positioned going forward, Thomas said in the downgrade note. 

“We believe the risk-reward for shares is more balanced on a six-month time frame. We see organic sales moderating from Q1, and incremental margin pressure in the quarters ahead," the analyst said. 

China tariffs could create downside to KeyBanc's EPS estimates if the furniture industry does not receive exemptions, Thomas said. 

Thomas higlighted positives and negatives from the company's earnings data. 

Positives

• Earnings per share of 39 cents came in above expectations.
• Comps were up to 3.1 percent, beating estimates of 2 percent.
• “LZB is getting closer to aligning its pricing with underlying raw material costs following several quarters of pressure. Moreover, Joybird could position LZB for 1-2-percent better underlying top-line trends," Thomas said. 

Negatives

• KeyBanc forecast a 26-cent EPS headwind from normalizing incentive comp.
• Recent China tariffs pose a risk to La-Z-Boy's margins, and tariffs are likely to cause material headwinds if the furniture industry is affected.

Projections

La-Z-Boy's execution remains strong, Thomas said.

“But we have a hard time arguing LZB shares warrant a rerating higher in valuation given some of the margin risks. We had previously maintained an OW rating on LZB since our April 2011 upgrade, and would potentially look to get more positive again at a lower valuation." 

Price Action

La-Z-Boy shares were slipping 5.6 percent to $35.40 at the time of publication Thursday. 

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Public domain photo via Wikimedia.