LEON’S FURNITURE LTD. $14.30 (Toronto symbol LNF; TSINetwork Rating: Average) (416-243-7880; www.leons.ca; Shares outstanding: 70.9 million; Market cap: $1.0 billion; Dividend yield: 2.8%) has steadily opened new stores, growing from 27 in 2003 to 78 today.
But the company more than quadrupled in size overnight with its March 28, 2013, purchase of its main rival, The Brick, for $700 million. The Brick has 228 outlets across Canada. Leon’s and The Brick will continue to operate as separate chains.
As a result of the acquisition, Leon’s sales jumped to $426.0 million in the three months ended March 31, 2014, from $162.5 million a year earlier. Earnings fell sharply, to $818,000, or $0.01 a share, from $5.4 million, or $0.08.
The lower earnings resulted from a 3.8% decline in same-store sales due to extreme winter weather, the lower Canadian dollar (which increases costs from suppliers outside the country) and one-time expenses related to the purchase of The Brick. As of March 31, Leon’s long-term debt was $416.8 million, or a manageable 42% of its $1.0-billion market cap. The stock yields 2.8%.
Growth by acquisition can be risky, especially with a deal this big. Leon’s will now need to keep successfully integrating The Brick and pay down its debt. However, the purchase continues to look like a good fit for the company.
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