Keeping its positive streak alive for the fifth straight quarter, Leggett & Platt Incorporated (LEG Quick QuoteLEG - Free Report) posted better-than-expected earnings in the third quarter of 2016. However, sales remained soft and missed estimates for the sixth consecutive quarter. While bottom line gained from unexpected deflation in raw material prices in the third quarter, top-line results were hurt by divestitures. Further, management raised its EPS outlook for full-year 2016.

The company’s quarterly adjusted earnings from continuing operations of 67 cents per share was flat year over year and surpassed the Zacks Consensus Estimate of 62 cents. The bottom-line was primarily aided by lower tax rate due to the new accounting standard for stock-based compensation. However, lower sales and reduced gain from commodity deflation were hindrances.

Delving Deeper

Net sales from continuing operations of this Zacks Rank #3 (Hold) company dropped nearly 6% to $948.9 million, falling short of the Zacks Consensus Estimate of $1,015 million. The decline can be attributed to the sale of four small businesses in the past one year, which contributed nearly 4% to the sales decline. Same location sales dipped 2% on the back lower volume, decline in raw material prices and currency headwinds.

Including inter-segment sales, total sales came in at $1,046.7 million, down 7.6% year over year.

Gross profit slumped 5.7% year over year to $227.4 million, while gross margin expanded 10 basis points (bps) to 24%. The company’s adjusted EBIT margin declined 30 bps to 13.7% in the third quarter, due to solid portfolio management. In dollar terms, adjusted EBIT was down 8% at $130.2 million.

Segment Details

Third-quarter Residential Furnishings’ sales dropped 7.4% to $484.5 million, due to a 6% decline in unit volumes, combined with currency headwinds and raw material price deflation, which accounted for a 2% dip in sales. Including inter-segment sales, total sales for the segment declined 7.5% to $490.2 million.

Sales of Commercial Products improved 2.7% to $154.2 million. However, total sales for the segment (including inter-segment sales) declined 4% to $164.3 million. Benefits from Work Furniture growth was more than offset by soft Adjustable Bed sales.

The Industrial Materials segment's sales plunged 33.1% to $71.4 million hurt by the divestitures. Same location sales slumped 8% driven by steel price deflation and lower unit volume in Drawn Wire. Total sales, including inter-segment sales, tanked 24.4% to $144.7 million.

The Specialized Products segment's sales rose 4.3% to $238.8 million, with same location sales rising 6% on the back of persistent strength in Automotive. Total sales for the segment (including inter-segment sales) also increased 3.2% to $247.5 million.

Financials

Leggett ended the quarter with cash and equivalents of $317.3 million, long-term debt of $1,055.4 million and shareholders' equity of $1,103.6 million. Leggett generated $123.6 million in cash flow from operations during the third quarter, with year-to-date cash flows of $385.7 million.

Further, the company had more than $450 million available in its commercial paper program by the end of the quarter. Its net debt to net capital ratio came in at 36%, falling within its target range of 30–40%.

In Aug 2016, the company declared quarterly dividend of 34 cents, highlighting its commitment to shareholders. Additionally, during the quarter, the company repurchased nearly 0.5 million shares, while issuing 0.8 million shares related to employee stock option exercises.

Further, Leggett remains focused on its key goal of achieving targeted 3-year Total Shareholder Return (“TSR”), ranking in the top-third of all S&P 500 companies. The company generated annual TSR of 17% (in the last 34 months) for the three-year period starting Jan 1, 2014. This places the company’s annual TSR in the top 14% of the S&P 500 list.

Guidance

Based on the sudden deflation in steel prices, which was earlier expected to inflate through the rest of 2016, the company delivered robust third-quarter results. Backed by the solid third-quarter performance and the current lower commodity costs, the company raised its earnings per share forecast for 2016, despite lower sales. The company anticipates generating record EPS, robust EBIT margin and enhanced cash flows in 2016. However, the company lowered its sales guidance for the full year due to the dismal sales performance in the third quarter.

Management now expects full year 2016 earnings per share in the range of $2.55–$2.62 per share from continuing operations, compared with $2.45–$2.60 predicted earlier. The latest outlook includes discontinued operations of 15 cents per share related to the second quarter’s litigation settlement proceeds. Further, it assumes effective tax rate of 25%.

Sales for 2016 are now anticipated to be roughly $3.75 million, reflecting a 4% decline year over year. Prior to this, the company had estimated sales to come in at $3.9 million. Further, the company expects volume growth of 2%, mitigated by a 3% decline from commodity deflation and foreign currency headwinds, as well as a 3% reduction from divestitures. Consequently, the company expects 2016 adjusted EBIT margin of over 13%.

Additionally, continuing with its trend of generating more cash than required to fund dividends and capital expenditures, the company expects operating cash flows of over $525 million for 2016. Capital expenditures for the year are anticipated to be approximately $125 million, while the company intends to spend $175 million toward dividend payouts. The company outlined its target dividend payout ratio to be 50–$60% of net earnings.

Further, Leggett expects to continue with its share repurchase program, having a standing authorization to buy back up to 10 million shares every year, after fulfilling all priority requirements.

Stocks to Consider

Some better-ranked stocks in the retail industry include American Eagle Outfitters Inc. (AEO Quick QuoteAEO - Free Report) , DSW Inc. and Fossil group Inc. (FOSL Quick QuoteFOSL - Free Report) , each carrying a Zacks Rank #2 (Buy). You can seethe complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

American Eagle, with a long-term EPS growth rate of 11.8%, has seen positive estimate revisions for 2016, over the past 90 days. Also, the company has topped earnings by an average of 9.3% over the trailing four quarters.

DSW Inc., with a long-term EPS growth rate of 8.3%, has seen estimates for the current fiscal trend upward in the last 60 days. Further, the company has recorded an average beat of 24% in the trailing four quarters.

Fossil Group has to its credit a spectacular earnings trend as the company hasn’t delivered a negative earnings surprise even once over the past four quarters. Moreover, its long-term EPS growth rate of 3.8% helps it stand strong against the industry.

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