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Investment Q&A

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Q: I am a conservative, retired, dividend-income investor. I normally save up to 5% "full positions" for typical blue chip stocks, like the telecoms, pipelines, banks, etc.

I have partial positions in Leon's (2% position), Magna (2%) and Nutrien (1.5%). Would you add to any or all of these? At this stage in the market cycle, would you favour one over the rest...please rank.

Thanks...your guidance throughout 2019 was much appreciated...love the service.
Steve
Read Answer Asked by Stephen on January 07, 2020
Q: Needless to say, as a shareholder since the 1980's, I was less than pleased to see the LEON family trust battles as front page news in Saturday's Fin Post. I suppose this sort of issue was inevitable, but it should really have no effect on day to day operations, correct? It's a "quiet" stock to begin with and now I know why the share price has been languishing, but it just enhances my DRIP's.
Read Answer Asked by Daniel on April 26, 2018
Q: Will the closing of Sears (SCC) directly effect any of its rivals?
Hudsons Bay (HBC)
Sleep Country (ZZZ)
Leon’s Furniture Ltd (LNF)

Is there a significant chance for these companies to capitalize on a hole in the market with Sears gone?
Read Answer Asked by James on November 09, 2017
Q: Circling back on Leon's Furniture as a stable dividend paying stock with hidden potential...


Furniture business is a tough one but Leon's is likely the best operator:
- there is no shortage of tough competition in this fragmented industry: Ikea, Costco, Wallmart, Sleep Country, Superstores and partially Amazon on-line & US shopping (although only subset of their inventory like electronics as people won't buy entire dining set on-line or load in their trunk across the US border).

- on the positive, landscape is also improving: bought their biggest / most direct competitor The Brick in 2013, Target is out of Canada, Future Shop closed and Sears Home is almost bankrupt.


Checking the financials, I was surprised to find Leon's actually growing despite tough Canadian economy: 2015 SSS: +1.2% and 2106 SSS: +4.1% - but based on above, to build a conservative case, I assume no sales growth going forward.


What struck my eye in the latest company presentation on their website is the likely financial improvement to come from internal synergies left from The Brick acquisition. Two slides caught my attention:

- "1% SG&A reduction = $20M savings": classical Leon's ran at ~32% while post-Brick, it shot up to 37.5%. In 2016, it finally started coming down to 36.5% with IT systems integration late 2015. Assuming it can continue synergies and get 1% down yearly over the next 4 years, it would add $0.24 to EPS yearly ($20M/83M shares).

- "$50M per year for debt repayment": From MD&A, current debt is $240M after $50M was indeed repaid in 2016. interest at ~3% so yearly interest expense savings of $0.03 yearly ($240M/$50M = 4.8 years; $13.3M interest / 4.8 years = $2.77M and $2.77/83M shares = $0.03).

- 2016 EPS was $1.05. Even with no growth, SG&A and Interest reduction could add $0.27 in 2017 (0.24+0.03) - with same savings target over next 4 years bringing to 2020: SG&A to 32.5% (pre-Brick acquisition) and almost all debt paid, with EPS up to $2.13. Even if hit only part of these targets, there is a lot of potential internal clean-up to improve financials.


A couple of other supporting item to thesis:
- Very aligned Management as Leon family owns 67% of the stock;
- Own most of their real estate, some rumors of possible REIT spin-off last year to unlock value;
- 20% dividend increase last quarter after a few years flat;
- Insider buying (Mark Leon bought 52K shares on March 8 for ~$900K)


Now back at ~$17, valuation seems modest compared to its 10-year average. LNF seems a good value stock - flying under the radar. Is above reasonable / realistic thesis? Thanks for your comments!
Read Answer Asked by Jennifer on April 09, 2017
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