Why Leon’s Furniture (TSE:LNF)’s Hidden Strengths Make It a Buy at 11x P/E

Leon’s Furniture (TSE:LNF) trades at a 11.09 P/E ratio, nearly half the median of its retail peers, despite delivering margin expansion, consistent earnings beats, and underappreciated strategic assets. This valuation gap creates a compelling opportunity to buy a company poised to benefit from housing market tailwinds, market share gains, and underpenetrated revenue streams. Below, I dissect why LNF’s undervaluation is a mispricing—and why investors should act now.

Margin Expansion: A Structural Advantage Ignored by the Market

Leon’s has executed a two-year margin transformation, with gross profit margins rising from 44.39% in 2024 to 44.6% in Q1 2025, driven by three unstoppable forces:
1. Product Mix Shift: A strategic pivot to higher-margin furniture sales (up 5.2% in Q1 2025) has offset weaker appliance demand. Furniture now represents 62% of revenue, up from 58% in 2020, and carries a 10-15% higher margin than appliances.
2. Cost Discipline: General and administrative expenses fell to 38.9% of sales, down 40 basis points year-over-year, as the company streamlined marketing (e.g., reduced reliance on Canada Post) and optimized distribution.
3. Supply Chain Recovery: Resolved inventory shortages post-2024 have enabled same-store sales growth of 3% in Q1 2025—outperforming a 9% comp from the prior year.

The results? Adjusted EPS surged 41% to $0.34 in Q1, blowing past analyst estimates of $0.21. Yet the market has yet to reward this performance: LNF’s P/E remains 31% below its own historical median of 11.45 and 41% below the Retail - Cyclical industry median of 18.83.

Beat-on-Beat Earnings Signal a Strong Balance Sheet

Leon’s has a “rock-solid balance sheet” with $469.7 million in unrestricted liquidity, enabling it to navigate macro risks while others falter. Key metrics:
- Revenue Growth: System-wide sales rose 2.7% in Q1 2025, with furniture sales up 5.2%—a rare outperformer in a sluggish retail sector.
- Profitability Leverage: EBITDA margins expanded 100 basis points to 10.4%, and net profit margins hit 4.1%, their highest since 2019.
- Debt Management: Net debt-to-EBITDA remains a conservative 0.7x, far below retail peers averaging 1.5x.

Analysts at Stifel recently raised 2025 EPS estimates to $2.19 (from $1.90) and 2026 to $2.28, citing “margin resilience and untapped service revenue.”

Strategic Assets: The REIT Spinoff and Financial Services Engine

The market overlooks two game-changing catalysts:
1. REIT Spinoff: Management aims to separate its $1.2 billion real estate portfolio into a REIT, unlocking hidden asset value. Even if the spinoff faces hurdles (a noted risk), the process will force a revaluation of LNF’s real estate holdings, which are likely undervalued on its balance sheet.
2. Third-Party Services: LNF’s warranty, insurance, and commercial financing services now contribute $180 million in annual revenue—up 12% year-over-year—with margins 50% higher than core merchandise sales. These recurring revenue streams are underpenetrated, with expansion plans targeting $300 million by 2027.

Risks? Yes, but Manageable

Critics point to tariff risks (15% of goods sourced from the U.S.), e-commerce competition, and REIT spinoff delays. However:
- Tariffs: LNF is pivoting to Canadian suppliers for furniture, reducing U.S. exposure.
- E-commerce: Its omnichannel strategy (online + in-store fulfillment) and $250 million in annual delivery revenue create a moat.
- REIT Spinoff: Even if delayed, the process itself will clarify the true value of LNF’s real estate.

Why Now? Asymmetric Upside Ahead

Leon’s trades at 11x forward P/E, yet its 10-year Shiller PE of 12.73 is below its historical average, despite stronger margins and balance sheet metrics. A reversion to the sector median of 18.8x P/E would imply a 69% stock price jump, while even a 14x multiple (its historical median) would deliver 26% upside.

With housing starts expected to rise 8% in 2025 (driving demand for appliances and furniture) and LNF’s dominant market share in Canadian home furnishings, this is a rare case of a high-quality company trading at a deep discount to its growth trajectory.

Action Item: Buy LNF now. The risks are priced in, the catalysts are tangible, and the margin story is only beginning.

Disclosure: This analysis is for informational purposes only and not a recommendation to buy or sell securities. Always conduct your own research.