Leon’s Furniture hints at ‘strategic’ price increases to counter rising fuel costs

In an environment where marketing must “scream value” to attract consumers, higher prices are a competitive disadvantage – but some strategic price hikes may be needed as rising fuel costs are putting the pinch on profit margins, Leon’s Furniture Ltd. LNF-T executives signaled on Friday.

The Toronto-based furniture and appliance retailer, like many others, is grappling with a jump in fuel prices that has raised the cost of shipping by sea, rail and truck.

“We definitely do not want to raise prices across the board. But we will be strategic in nature where we can,” chief executive officer Mike Walsh said during a conference call Friday morning to discuss the company’s second-quarter results.

Affordability remains a challenge, he added, especially in big-ticket discretionary purchases such as furniture.

“We’ve seen that the customers are still shopping, they’re still buying – but they truly want value, and so your marketing has to scream value to the consumer to attract them into your stores,” he said.

Leon’s reported a slight decrease in revenues, to $631.2-million in the quarter ended June 30, down 2 per cent compared with the same period last year. That fell slightly below analysts’ expectations of $635.9-million in revenue, according to average estimates compiled by S&P Capital IQ.

The number of units sold was up compared with last year, but customers traded down to lower-priced products, executives said.

Both furniture and appliance sales decreased on a dollar basis – a significant slowdown from this time last year, when furniture sales were up roughly 6 per cent. Meanwhile, the mattress category saw sales increase.

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“Premium” customers continue to spend on higher-priced products, Mr. Walsh said, but at the midpoint, which is Leon’s focus, the retailer is seeing customers choose lower-priced options.

This value-seeking behaviour is a trend Leon’s has been observing for the past year and a half, he added.

The company’s second-quarter net income grew to $35-million or 51 cents per share, compared with $31.8-million or 47 cents per share in the same period last year. However, the earnings were affected by a gain on financial derivative instruments in the quarter, compared with a loss in the prior year.

Excluding that impact, adjusted net income fell to $34.8-million or 51 cents per share, compared with $39.4-million or 57 cents per share in the quarter last year. The decline resulted from a $1.4-million settlement benefit the company received during the quarter last year, as well as a large swing in the valuation of its U.S.-dollar payables. Retailers generally purchase inventory from overseas suppliers in U.S. dollars, and last year’s quarter benefitted from more favourable exchange rates, versus a strengthening U.S. dollar this year.

Leon’s has been cutting costs despite inflationary pressures, executives noted.

Looking ahead, in addition to higher transportation costs, the retailer has also begun to see delays related to some of its shipping lanes in Asia. That may cause some delays in furniture deliveries in the third quarter, “related to some of the geopolitical supply-demand issues that we’re seeing,” chief financial officer Victor Diab said on the call.

Leon’s is working with carriers and brokers to find alternative routes to delivery inventory, he added.