good company in a so-so industry that is going through bad times. Not a
particularly compelling investment thesis, and this isn’t the best or the
cheapest company offered up here. Still it’s an easy to understand company
providing a 8.45% FCF yield at current prices that is both well run and
under-leveraged considering the cash it generates. The last point will likely
be remedied due to a massively stepped up its buyback plan to allow for a
notional reduction in share count of nearly 20% at recent prices.
Furniture (STLY) is active in the upper-middle end of the residential wood
furniture market as a manufacturer and distributor. Aside from STLY and other
furniture makers being met with general investor disinterest in all things
housing-related, business has softened and many of STLY’s competitors have been
putting in appearances on the 52-week low list.
solely on the mercifully low standards by which furniture companies are judged,
you might conclude STLY is side-stepping whatever’s hitting its peers. For
instance, they achieved an ROE of 17.49% last year with cash on the books.
Other stats – such as the halving of incremental margins to 9.9% last year and
the painfully obvious drop in revenue and net – suggest the they’re getting hit
just as hard. Frankly, I don’t know which conclusion is correct or when things
will improve. But given STLY’s rather
unique operating model (described below), and the likelihood of modest seasonal
improvements beginning this quarter, I don’t think STLY will follow its peers should
they go much lower. Some background is in order before moving on to the
company dates back to the 1920s. In 1985 Albert Prillaman, essentially a lifer
at Stanley, succeeded to
the company’s chief executive office. Prillaman began differentiating the company
from its competitors by shortening production runs, with the lag between orders
and shipments narrowing in consequence. To this day, Stanley averages less
than two weeks between receipt and shipment on orders. DSOs last year were just
under 40, though this rose to 46 at the end of Q1 06. I’m showing that
competitor Bassett Furniture averaged something like six times this in 2005.
were a few organic growth initiatives (a brief excursus into the upholstered
segment ended when returns didn’t measure up to expectations), but Prillaman
largely focused on the niche STLY had staked out. Performance proved the wisdom
of the move. When competitors were running themselves to ground, STLY began a
run that would end in Q3 2000 with 21 consecutive quarters of record earnings.
though, brought upheaval at Stanley (which
hitherto operated basically as a straight-up manufacturer) as imports began
squeezing the industry. HomeLife, the company’s largest customer accounting for
7% of sales, was bankrupted and shuttered, and Stanley wrote off
everything it was due. Management began instituting change.
immediately, a facility employing 13% of STLY’s workforce was closed. More
importantly, management moved to a “China-proof” blended model where they
continued to manufacture goods on which they could maintain margins while
importing pieces on which they felt they could not compete realistically.
Crudely put, big irregularly shaped items are manufactured while flat-stacking
numbers are sourced from Asian vendors. STLY is currently sourcing about a
third of its sales from overseas.
can be expected, the sourcing initiative lead to inventories swelling. Somewhat
counter-intuitively, though, the larger inventories permit them to maintain
their 14-day receipt to delivery turns (the paired Asian chairs have to be on
hand to complement the STLY-made table). Despite the need to now maintain an
inventory, they’ve done a pretty fine job managing their working capital. STLY
is one of those companies where you can only look at their Value Line page and
marvel at the regularity.
year they began stumbling a bit. Briefly, they disappointed sales expectations
on the past few quarters – though these were comp-ed on prior years that saw
double-digit growth. Q2 results showed sales were down 7.36% while net
plummeted 32.43% on a YOY basis.
are several. First, energy and materials (lumber) costs were up. Second, margins
were down on account of a seasonal inventory build (normal), depressed sales
(worrying, but again having a seasonal component and typical of the industry as
a whole) and operating inefficiencies. Management has indicated inventories
will likely be worked through in the second half, when sales are historically
higher. On recent calls, STLY reported inaugurating Toyota-style lean
manufacturing and lean office programs.
HOUSING, CHINA AND MIDDLEMEN
imagine these would be foremost among the concerns of potential investors. Housing
I’m agnostic on. As to the others, I am mindful of them, but can’t help but
note that they’ve long been in operation, often in less ameliorated form. For
those with some interest, there has been some good give-and-take on these
matters in prior furniture write-ups here, and I refer readers in particular to
the excellent Furniture Brands treatment (and subsequent Q&A) submitted by wizard877.
I agree with most of what he/she said on regarding these, and indeed would
amplify much of it in the case of STLY: I have now read several accounts of
middlemen getting damaged goods or getting their orders so late from Asian
suppliers that cost advantages are lost. There was an article in the Daily Deal
a few months back about Pennsylvania House having to throw away truckloads of
Chinese goods, the pieces being so shoddy and remedy being remote, costly and
time-consuming. Yes, this is anecdotal, but it goes to what I believe is a
superior operating model providing durable competitive advantage for STLY.
RETURN OF CASH
what this ultimately is. While also paying a modest (but growing) dividend, management
is a keen buyer of their own shares when prices are right. Long periods can
pass when no shares are bought back, but when prices are right the purchases
are dramatic. 1.06 million were bought back in 2005. As of the start of the
present quarter, they had bought something like 635,000 shares back for an
average of $25.44 per – almost 10% above today’s close.
announcing recent results, the company announced the board had increased the
amount available for buybacks to $50 million. More on this below.
of the sort detailed by Greenwald et al in their excellent Value Investing: From
Graham to Buffet and Beyond are becoming a prerequisite here. The formulas are
given in the book, and I tried to bake some conservatism into the calculations
by understating some of the assumptions. I upped the WACC to 8.25 from what I
calculated as 7.9. Revenue growth since adopting the blended model has been
almost 9 percent. I used 5 instead as five years of history is pretty
inconclusive. I went with an ROIC of 11.75, which is the average since they
started importing (it has been rising – last year’s was a bit north of 13).
This got me to $28.40 per share, almost 20 percent above the current. If they
were to leverage up and complete their buyback tomorrow, the notional reduction
in share count and WACC gets me just over $40 per share.
noted in the most recent earnings call, the $50 million is about what they spent
on buybacks over the last 18 months. If it takes them that long to spend their
knot this time around, the approximate $30 million in cash they generate over
those 18 months will largely provide the funding, leading to a less pronounced
Furniture (BSET), Haverty Furniture Companies (HVT, which yesterday reported a
10.3% jump in same store sales), Chromcraft Revington (CRC – subject of an
excellent treatment here by cogitator505) and Hooker Furniture (HOFT – via which
steve308 delivered members a triple in under two years) are some of the logical
comps, though none shares STLY’s exact niche. Yahoo!, first resort of the
slothful, is source for the data in the below, hence any variation from above
figures for STLY:
For FCF I used net income plus D&A minus total CapEx, as I can’t really
tell how much is maintenance. CapEx last
year was $4.9 million versus generous depreciation of $5.6 million. I’ve used
2005’s full-year figures in the present calculations as the numbers are incurred
and recorded irregularly. Management has suggested these numbers will come in
relatively unchanged this year.
Warehousing requirements have been a topic of conversation on the last
several earnings calls. While they’ve been leasing space as required, there is
a possibility that they’ll build a facility of their own at some stage.
Balancing this to a degree are statements over the past year that they believe
they have surplus plant capacity to do as much as an additional $100 million in