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Leggett (LEG) Misses on Q4 Earnings & Sales; Offers Outlook

Leggett & Platt IncorporatedLEG posted dismal results for fourth-quarter 2016, wherein both sales and earnings declined year over year and fell short of estimates. While the bottom line broke its five quarter long trend of positive earnings surprises, the top line marked its seventh straight miss this quarter.

While the results didn't have much of an impact on the stock price, shares of Leggett have underperformed the Zacks categorized Furniture industry in the past three months. Leggett's shares have jumped 3.5% in the last three months, while the industry gained 9.3% over the same time frame.

Leggett & Platt, Incorporated Price, Consensus and EPS Surprise

Leggett & Platt, Incorporated Price, Consensus and EPS Surprise | Leggett & Platt, Incorporated Quote

The company's quarterly adjusted earnings from continuing operations of 53 cents per share declined nearly 17% year over year, falling below the Zacks Consensus Estimate of 58 cents. The bottom line was primarily hurt by a sudden inflation in steel costs toward the end of 2016, as compared to major deflation witnessed in the year-ago period.

Delving Deeper

Net sales from continuing operations of this Zacks Rank #3 (Hold) company dropped nearly 4% to $903.7 million, falling short of the Zacks Consensus Estimate of $929.7 million. The decline in top line can mainly be attributable to divestitures, somewhat compensated by a marginal increase in unit volumes. Including inter-segment sales, total sales came in at $996.1 million, down 5.8% year over year.

Gross profit tanked 12.6% year over year to $204.2 million, while gross margin contracted 210 basis points (bps) to 22.6%. The company's adjusted EBIT margin declined 250 bps to 11.3% in the fourth quarter. In dollar terms, adjusted EBIT was down 21.3% at $102.5 million.

Segment Details

Fourth-quarter Residential Furnishings' sales dropped 6.5% to $458.5 million, mainly due to a 5% decline in unit volumes. Including inter-segment sales, total sales for the segment declined 6.4% to $464.4 million.

Sales of Commercial Products improved 9.9% to $143.7 million. However, total sales for the segment (including inter-segment sales) dipped 0.1% to $151.5 million. Benefits from in Adjustable Bed and Work Furniture growth was negated by lower volumes at Fashion Bed.

The Industrial Materials segment's sales fell 33.3% to $61 million, hurt by divestitures and steel price deflation. Unit volumes remained flat during the quarter. Total sales, including inter-segment sales, tanked 21.4% to $130.5 million.

The Specialized Products segment's sales improved 3.6% to $240.5 million, backed by strong Automotive volumes, partly offset by negative currency impact, divestitures and soft volumes at Machinery and Aerospace. Total sales for the segment (including inter-segment sales) also increased 2.7% to $249.7 million.

2016 Highlights

While the fourth quarter results were soft, Leggett's adjusted earnings for 2016 jumped 6% year over year to $2.49, fuelled by lower tax rate and reduced share count. However, the bottom line missed the Zacks Consensus Estimate of $2.54.

Net sales for 2016 declined 4% to $3,749.9 million, also lagging our estimate of $3776 million. Gains from unit volume growth and contributions from buyouts was more than offset by divestitures, currency headwinds and raw material price deflation that occurred just before the beginning of the fourth quarter.

Nonetheless, the adjusted EBIT margin expanded 10 basis points to 13.1% in 2016, marking Leggett's highest EBIT margin since 1999.

Financials

Leggett ended the year with cash and equivalents of $281.9 million, long-term debt of $956.2 million and shareholders' equity of $1,094 million. Leggett generated $552.6 million in cash flow from operations during 2016.

Further, the company had more than $550 million available in its commercial paper program by the end of the year. Its net debt to net capital ratio came in at 34%, falling within the target range of 30-40%.

Notably, 2016 marked Leggett's 45th straight year of dividend hike. Additionally, during the year, the company repurchased nearly 4.5 million shares, while issuing 2.4 million shares related to employee stock option exercises.

Further, Leggett remains focused on its key goal of achieving targeted three-year Total Shareholder Return (TSR) ranking in the top third of all the S&P 500 companies. In this regard, management aims to generate average annual TSR in the range of 11-14% in the near future. The company mainly aims to achieve this through solid revenue growth and robust dividend yields, with modest contributions from share buybacks and improvements in EBIT margin.

Guidance

Management remains pleased with its 2016 performance, as it witnessed record EPS, superb EBIT margin, healthy cash flows and its 45th dividend hike this year. For 2017, the company expects inflation to continue. Also, management anticipates sales to increase by $250 million in 2017, driven by improved volumes at its Automotive, Bedding, Adjustable Bed, Work Furniture, and Geo Components businesses.

Leggett aims to achieve this volume growth via content gains, new products, enhanced market share and overall market advancement. Driven by these factors, Leggett also expects solid profit margins and increased EPS for 2017.

Sales for 2017 are anticipated to lie in a band of $3.95-$4.05 billion, reflecting a 5-8% year-over-year growth. Further, the company expects mid-single-digit volume growth, along with commodity inflation for 2017. Consequently, the company expects 2017 EBIT margin of approximately 13%.

Management expects full year 2017 earnings per share in the range of $2.55-$2.75 per share from continuing operations.

Additionally, continuing with its trend of generating more cash than required to fund dividends and capital expenditures, Leggett expects operating cash flows of over $450 million for 2017. Capital expenditures for the year are anticipated to be approximately $150 million, while the company intends to spend $185 million toward dividend payouts. The company outlined the target dividend payout ratio to be 50-60% of its net earnings.

Further, Leggett expects to continue with its share repurchase program, having a standing authorization to buy back up to 10 million shares every year, after fulfilling all priority requirements. Finally, the company plans to repurchase 3-4 million shares in 2017, while issuing nearly 2 million shares for employee benefit plans.

2019 Goals

The company recently outlined its goals for 2019, based on the achievement of its top-third TSR target over the next three years. These include revenue of about $4.75 billion, EBIT margin of 13.3%, EPS of $3.25 and a dividend of $1.70 per share.

The company aims to achieve these goals due to a stable macro environment with decent demand enhancement and persistent content gains and product introductions. Further, the company expects these targets to be fueled by organic growth, which in turn is expected to be backed by strategic buyouts, with the absence of any significant inflation, deflation, divestitures, tax policy amendments and currency impact.

Stocks to Consider

Better-ranked consumer discretionary stocks worth considering include La-Z-Boy Incorporated LZB , and Tailored Brands, Inc. TLRD , both carrying a Zacks Rank #1 (Strong Buy), and Masonite International Corporation DOOR , which holds a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

La-Z-Boy has witnessed positive earnings estimate revisions over the past 60 days. Also, it has an average positive earnings surprise of 5.7% over the trailing four quarters.

Tailored Brands has long-term earnings per share growth rate of 17.5% and decent earnings surprise history. Further, the company's positive estimate revisions for the current fiscal bode well.

Masonite International has a solid earnings surprise history, and ranks among the top 26% out of over 250 industries.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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