LEON’S FURNITURE LTD. (Toronto symbol LNF; www.leons.ca) 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%.
Leon’s will now need to keep successfully integrating The Brick and pay down its debt.
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Canadian stock market: BMTC Group plans to continue share buybacks
BMTC GROUP (Toronto symbol GBT.A; no website) is one of Quebec’s biggest retailers of furniture, electronics and appliances, with 36 outlets. It mainly sells these products through its two affiliates: Brault & Martineau and Ameublements Tanguay.
In March 2012, BMTC introduced a new banner, EconoMax, which offers lower-priced products. The company rebranded four outlets that had operated as Brault & Martineau liquidation centres.
In 2013, BMTC opened four more EconoMax stores, and in March 2014, it added one in Joliette. It plans to open another, in LaSalle, in fall 2014.
In the three months ended March 31, 2014, sales fell 4.4%, to $145.1 million from $151.8 million a year earlier. It lost $0.03 a share in the latest quarter, compared to a $0.03-a-share profit a year ago. The first quarter is typically the slowest for the company.
BMTC repurchased 4.0% of its shares in 2013, and it plans to continue these buybacks. Repurchases cut the number of shares outstanding, which means per share earnings rise because net income is divided by fewer shares. That helps boost stock prices.
In the latest edition of Stock Pickers Digest, we examine the ongoing risk of a huge acquisition, as Leon’s continues to integrate The Brick. We also look at the risk of BMTC having its profit margins squeezed with its discount Economax stores in a tough retail climate. We conclude with our clear buy-hold-sell advice on these two stocks.
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What is the best example of a stock you owned that succeeded with a big acquisition and multiplied the value of the shares? Have you had any stocks that botched a big acquisition so badly that you eventually sold the shares?
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LEON’S FURNITURE LTD. (Toronto symbol LNF; www.leons.ca) has steadily opened new stores, growing from 27 in 2003 to 78 today.