VALUE: After Hours (S07 E38): Leon’s Furniture: Canada’s Durable Retail Giant

During their recent episode, Taylor, Carlisle, and Adam Wilk discussed Leon’s Furniture: Canada’s Durable Retail Giant. Here’s an excerpt from the episode:

Tobias: Can you walk us through the furniture?

Jake: That’s the one you pick?

[laughter]

Adam: Absolutely. Yeah. No, it’s interesting. It’s interesting.

Tobias: I’ll tell you why I’m interested in furniture. Because I think that there’s a broader theme. There’s a housing and– I just want to hear in that context, but I don’t want to–

Jake: People like to sit.

Tobias: [chuckles] I don’t want to get in front of your thesis.

Adam: Everybody needs furniture, so we have– So, I wrote this company up, it’s called Leon’s Furniture. They’re the largest furniture retailer in Canada. I wrote the company up a few quarters ago or last year, I can’t remember, in one of my letters. And I compared it to Nebraska Furniture Mart. It’s definitely not apples to apples. NFM is significant. I think they do like a billion dollars out of their one store in Omaha, which is insane.

But Leon’s is very scaled. They’re the largest furniture retailer in Canada. They have 300 stores across the country, and they also have an e-commerce business. The furniture business is 100 years old. It was founded by an immigrant in the early 1900s. It’s gone through a few iterations as a business, but they acquired their largest competitor in 2013, which is like, I don’t want to say discount furniture, but on the lower end and Leon’s is in the mid-market, I guess range for furniture and pricing. And since then, they’ve grown their revenues and earnings per share pretty significantly.

If you look back over the last 10 years and 20 years, Leon’s is about as durable of a business, especially for a retailer that you could find. They’ve had zero years of unprofitability through all economic environments over the past 10 years and 20 years. They’re have just been excellent stewards of capital and really good operators.

The company’s 70% owned by the Leon family, who is a founding family obviously. The profile is basically they can grow somewhere between 3% to 5% every single year. They have the largest market share in Canada. They’re basically known as a big box store. They’re at about 15% or 17% market share. They dwarf their next largest competitor in terms of size. Fastfirewatchguards.com can help protect large retail operations like this, ensuring safety and security across all locations.

Well, IKEA is their next largest competitor. So, they don’t dwarf IKEA, but outside of them and IKEA, their next largest competitor is multiples smaller than they are. And in Canada, if you study the history of big box retail like Loblaws, Canadian Tire, etc., these guys basically gobble up all the market share over time. I think Leon’s is headed in that direction.

What makes it interesting, is that in 2023, for the first time ever, they hired a non-family member CEO. And that guy since that time period has repurchased 10% of shares outstanding. He has paid out a significant amount of capital. He has grown the business significantly, and they just started instituting an IR presence. And so, I think Leon’s, despite being a $1.8 billion Canadian business, they’re fairly underfollowed and overlooked. I think it’s because they haven’t really spent a lot of time communicating with investors, which is about to change.

In fact, for Q3, they’re hosting their first conference call, I don’t think ever, but in a very long time. I think it will start to be a regular thing moving forward. But today, on that $1.8 billion market value, you’re getting a normalized $300 or so million of EBITDA and probably $200 million to $225 million in free cash flow. And that free cash flow can grow over time, especially, because as Leon scales or as they grow their revenues get bigger, there’s opportunities for margin expansion, just doing some internal initiative things and just getting larger. There’s also the opportunity for some M&A.

The furniture industry is going through some difficulties both in the US and in Canada. I think as their competitors go out of business, they can absorb that incremental market share which will again strengthen the business over time. The scale that Leon’s brings to the business means that they have some version of pricing power with their business. They are by far the largest advertiser in the country. They spend by my estimate, I think, over $100 million in advertising expense. They’re all over the place.

When times when things happen like COVID or supply chain issues or something like that, their scale still allows them to get inventory into the stores. As an example, they are the largest importer of shipping containers into the country of Canada. If you look at their margin profile over the last– And they have some boots on the ground in China, etc. And so, their cogs are remarkably durable and they can work through even adverse economic scenarios just given their scale. If you look at their margin history over a long period of time, you can see the stability of that as well.

I’m interested in the furniture business. One of their comps, a large furniture retailer called Sleep Country was sold in 2024 for, I think, around eight and a half times EBITDA and 18- or 19-times’ earnings. Sleep Country is the number one mattress retailer in Canada. They were bought by Fairfax. Leon’s trades at a mid-single digit multiple of EBITDA and 10-or-11 times earnings. It’s two times the size of Sleep Country. It’s a number two mattress retailer in Canada. They weren’t quite growing as fast, but their scale and market share dwarfs where Sleep Country was on their store count. And so, I think that’s an interesting comp, just as a single deal to look at.

I’m interested in the furniture business. I think it’s cheap, I think it has opportunities for growth. I think capital allocation has been excellent. I think it’s very durable. But there’s also this other angle where Leon’s through the decades has amassed this really valuable portfolio of real estate, including on their headquarters where they have a 40-acre lot that’s right off of the 401 or 410 Highway Downtown Toronto. I estimate this lot is alone is probably worth a few hundred million dollars. And their plan is to partner with a developer and build houses like vertical homes on the lot. That’s going to be a longer-term project, but I still think it’s interesting and not being captured in the value today.

And then, they also have a significant amount of store and distribution space that they’re in the process of IPOing which will serve to unlock that value. This is a well-formed playbook that some of the larger retailers in Canada have undergone before like Canadian Tire, I believe is the most recent example, where they IPOed or spun off their real estate into a REIT. And then, they obviously were given a significant cash pile for dividends or a special dividend or buybacks. And then, they basically could add or remove properties from the REIT over time, and it serves as another source of cash flow for the business. But most importantly, it serves to highlight the value of the real estate portfolio, which in Leon’s case today is being held on their books for somewhere below $300 million.

And so, between the retail business and the real estate, I think however you slice it, you have an incredibly interesting and cheap asset that has opportunity for growth and really good capital allocation, but you get the upside of whatever happens with the real estate moving forward. It’s not going to happen tomorrow or six months from now, but I think within the next 12, 18, 24 months, the picture could be a little bit clearer, and that value will start to be highlighted. In addition to just the runway, I think in 10 years, Leon’s will have more market share and earnings will be higher, etc. I think it’s a really interesting setup.

Tobias: What’s the top line of furniture look like? Does it follow the property market, or how does it– There’s always a household formation, or what’s it look like?

Adam: Yeah, it’s a good question. It’s definitely tied to housing. Leon’s, I think responded well to any dips industry wide by again taking market share. You can look back over the last couple of quarters. Industry wide, things have gotten pretty rough. Leon’s has grown same store sales. I think that’s absorbing incremental market share among some other things. And so, they’re fairly in a really good competitive position from that standpoint.

But in Canada, it’s driven by housing and also immigration. There are some tailwinds there. I think family formation in Canada has been fairly robust. Furniture is not recurring revenue or recurring purchase, but Leon’s does have some form of a recurring customer in people who come back and purchase more furniture over time.

The biggest thing that drives Leon’s revenues is not how home starts, but it’s household formation. So, people having children, and moving to a bigger home, or having more people in the house and remodeling, and so that’s been a big driver for them. I think they mentioned something like a base of 16 million households where there’s a formation aspect there that could drive some repeat purchases over time.

And then, Canada is one of the most friendly immigration countries. I think they’re letting in a net 500,000 people per year, something along those lines for school and for work, etc. So, that drives a lot of the activity as well. And so, I don’t have my numbers in front of me right now, but I don’t think Canada’s housing market is in particularly great shape. But between the market share gains, the immigration and just catering to household formation, I think they’re in a pretty good spot. Again, there’s a path to growing revenues at low to mid-single digits moving forward.

Tobias: Sorry, JT, you had a question there.

Jake: No, no, it’s fine. I’m [crosstalk] good.

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VALUE: After Hours (S07 E38): Leon’s Furniture: Canada’s Durable Retail Giant

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