Furniture-maker Nova LifeStyle Growing Distribution Network & Top-Line

Zacks Small Cap Research

By Steven Ralston, CFA

As a designer, manufacturer and seller of residential furniture, Nova LifeStyle (STVS) is positioned to supply urban-contemporary furniture to lifestyle-conscious middle-income consumers around the globe. The company’s residential furniture is manufactured in China and the U.S. and sold to distributors, wholesalers and retailers globally and also directly through a network of franchise stores in China. In August, the company applied for an uplisting to NASDAQ, which, if approved, should benefit the company through better institutional investor awareness and increased share liquidity.

Management’s strategy is to grow the company’s revenue base and to improve the level of profitability. Revenues have increased at a 36.8% compounded annual growth rate (CAGR) over the last three years through acquisitions of furniture manufacturers/distributors that broaden the company’s product mix and through organic growth by expanding the scope of the company’s distribution network and by new product offerings. The company broadens its product lines by introducing new collections and styles. All furniture offerings are
 supported by sample display showrooms, brochures and online marketing. In addition and importantly, the company participates in furniture trade exhibitions to stimulate sales and expand distribution. On the profitability front, management’s objective is to improve the gross margin to the 30% level; the company’s average gross margin over the past three years was 25.5%. To achieve its goal, management is emphasizing direct sales to retailers in an effort to reduce the proportion of lower-margin sales to distributors, along with introducing high-margin products and investing in lower-cost manufacturing facilities in China.

Headquartered in Commerce, California, Nova LifeStyle is a designer, manufacturer and marketer of modern upscale residential furniture, primarily in North America (54% of net sales during the first nine months of 2013),
 the People's Republic of China (21%) and Europe (20%). The contemporary design of the company’s furniture (dining tables, sofas, cabinets, chairs, cupboards etc.) is intended to appeal to the stylish preferences of urban, middle-income consumers. The company’s upholstered, wood and metal-based residential furniture is supplied both to furniture distributors and directly to retailers. Private label retailers and furniture distributors offer Nova Lifestyle’s products under their own brand names.

 

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NORTH AMERICA

In North America, the company sells its Diamond Sofa furniture products to furniture distributors and retailers and also through over 300 third-party shopping portals, such as homeclick.comamazonMadison SeatingATG Stores and Access Furniture, along with Diamond Sofa’s own website. Retailers like Nebraska Furniture Mart, a subsidiary of Berkshire Hathaway (BRK-A), sells sofas, ottomans, sofa chairs, accent chairs, TV stands, cabinets, end tables, dining tables, bar stools and beds supplied by Diamond Sofa. Also, Sears Holdings (SHLD) sells 200 different Diamond Sofa products that are fulfilled by partners, such asivgStoresHomeandLiving.comBEYOND Stores and Modernfurniturewarehouse.com.


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Diamond Sofa’s furniture pieces and collections feature an urban-contemporary style with an inherent Zen-like quality. Diamond Sofa maintains showroom spaces in Las Vegas, NV and High Point, NC.

CHINA

In China, Nova LifeStyle sells its branded furniture through a network of 59 franchise stores located in over 30 provinces, mainly within furniture marketplaces or shopping malls. The locations of the stores help build brand awareness for the company’s furniture among consumers. Each franchise store individually markets and advertises in local media while the company coordinates large-scale promotions for new product introductions. Management expects to expand the network to over 200 stores throughout the People’s Republic of China (PRC). In China, Nova LifeStyle also has an online sales presence with its own retail website.

The brands offered in China include Colorful World (花花世界), which is designed for smaller, urban living spaces; Giorgio Mobili, upper-middle-income modernfurniture styled in a neo-classical Italian design (Poly Form Loose); Ming Ma, avant-garde furniture inspired by traditional Ming dynasty designs; and Sleeping Life of Colorful World (花花世界睡眠生活), which sells beds and luxury mattresses that are made in Commerce California by Maxim Mattress and feature hypo-allergenic natural latex foam. To tap the opportunity for incremental internet sales, Nova LifeStyle launched an online store in China in September 2012. In addition, the company sells to wholesalers and agents for both domestic Chinese retailers and exporters.


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Under development for over two years, Nova LifeStyle is launching of two new brands: 1Sofa and Wo Zhi Bao (屋之宝). 1Sofa is a dynamic lifestyle product line with distinctive bright colors and random pattern combinations for the middle-income consumer. Wo Zhi Bao is more moderately priced for middle-low income consumers and features popular fashion and casual designs. Both brands offer furniture across all product categories.

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Nova LifeStyle is also in the process of launching the NOVA QWIK! line of office furniture (including cabinets, cupboards, shelving units, office desks and safe boxes) which is easy to assemble with the assembly process not requiring a single screw. According to the Business and Institutional Furniture Manufacturer's Association (BIFMA), U.S. office furniture consumption is estimated to increase +5.4% to $11.9 billion in 2013 and further increase 7.7% in 2014 to $12.8 billion. The company is negotiating distribution agreements with several US appliance store chains.

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In China, the company’s manufacturing, warehousing and distribution facilities encompass 100,000 square meters and are located in the Nange industrial area of Dongguan, which is roughly 62 miles (100 kilometers) northwest of Hong Kong. The furniture is primarily manufactured from medium-density fiberboard, veneered or lacquered particleboard, steel, glass, marble, leather and/or fabrics.

EUROPE

Nova Lifestyle has established distribution relationships in Europe serving as an OEM manufacturer to private label retailers like BUT international in France andDormitienda in Spain, along with John Lewis and Leekes in the U.K. In France, the company also supplies Conforoma, a 200-store furniture chain acquired by Steinhoff International Holdings Ltd. (SHF:SJ) in 2011. Nova Lifestyle received its first order for 4,000 items from Conforoma in June 2012.  Nova Lifestyle’s products are sold by private label retailers under their own brand names. Nova Lifestyle also serves Actona Company, a Danish furniture distributor and major exhibitor at theimm cologne international furnishing trade fair held every January in Köln, Germany.

CORPORATE HISTORY

Nova LifeStyle was formed during 2011 through a series of transactions, principally the combination of Nova Furniture (a British Virgin Islands company, which founded a wholly foreign owned enterprise in China for the manufacture and sale of furniture in 2003) and St. Joyal (a California corporation engaged in business investment and development, including significant contributions to the development of Nova Furniture’s distribution network since 2009). The combined entity completed a reverse acquisition with Stevens Resources, which was renamed Nova LifeStyle, Inc. on June 27, 2011. Nova LifeStyle’s Chairman and CEO, Ya Ming Wong, and CFO, Yuen Ching Ho, were the owners of Nova Furniture, and as a result of their equity interests, they now own approximately 52.4% of Nova LifeStyle.The owners of St. Joyal, Jun Jiang and Steven Liu, now hold about 12.2% of the company.

Acquisitions

In August 2011, Nova LifeStyle acquired Diamond Bar Outdoors, Inc. (a California corporation engaged in the import, marketing and sale of furniture in the U.S.) for $450,000 in cash from its sole shareholder, Jun Zhang. Diamond Bar does business as Diamond Sofa, and was a distributor of Nova LifeStyle’s products prior to its acquisition. Tawny Lam, CEO of Diamond Bar and a co-founder of the Diamond Sofa brand in 1992, became President of Nova LifeStyle. Diamond Sofa continues to distribute Nova Furniture’s products to retailers, including Living Spaces and Rooms To Go.

 

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Nova LifeStyle acquired Bright Swallow International Group Limited in April 2013 for $6.5 million in cash from its sole shareholder. Zhu Wei. With offices in Hong Kong, Bright Swallow (a British Virgin Island company with manufacturing facilities in China) produces and sells urban-contemporary furniture in China andcomplements Nova’s furniture lines. Bright Swallow has an established furniture distribution client base, including The Brick Ltd whose retail segment operates approximately 230 locations in across Canada under The Brick, United Furniture Warehouse, The Brick Mattress Store and Urban Brick names, along with a website for e-commerce. Retailing household furniture, home office furniture, mattresses, rugs, appliances and home electronics, The Brick was acquired by Leon's Furniture Limited (LNF.TO) in March of 2013.

BUILDING DISTRIBUTION

Nova LifeStyle exhibits at furniture trade shows in the U.S., Europe and China throughout the year as part of its marketing effort. The company has participated in the International Famous Furniture Fair (3F) in Dongguan, China; the China International Furniture Exhibition in Shanghai, China; at imm cologne in Köln, Germany (in connection with Actona Company) and at Interiors UK in Birmingham (with Yeh Brothers). In addition, the company’s Diamond Sofa subsidiary exhibits bedroom, living room, dining room and office furniture at North Carolina’s High Point Market (at both Spring and Fall six-day venues), which is the largest furnishings industry trade show in the world where approximately 75,000 attendees view retail home furnishings of over 2,000 exhibitors displayed on 11.5 million square feet of show space in 180 buildings. Nova LifeStyle also maintains showrooms at its Nova Dongguan facilities in China and at Diamond Sofa’s headquarters in California.

THE IKEA CONNECTION

In May 2012, Nova LifeStyle announced that construction began on a 15,000 square meter (161,500 square feet) production line to supply IKEA, the world's largest home furnishing retailer, with lacquered furniture.  The state-of-the-art "green" plant located adjacent Nova LifeStyle’s Dongguan manufacturing facilities is expected to support IKEA’s rapid retail expansion in Asia. Once the manufacturing capacity is complete, a long-term purchasing agreement with IKEA should be finalized. Management estimates that OEM sales to IKEA could potentially generate between $20 million and $25 million of incremental revenues annually.

CONCLUSION

Nova LifeStyle has a market capitalization of $80.0 million based on the 19.1 million shares outstanding as of September 30, 2013, but the float is much lower at 6.8 million shares due to high insider ownership. The company has working capital of $21.9 million and a current ratio of 2.75 though accounts receivable are somewhat high. Based on 12-month trailing earnings, the stock is valued at a price-to-earnings (P/E) ratio of 15.0. Reuters provides a Home Furnishings industry roster which can be displayed and sorted by 14 different parameters. The SALES sort indicates that Nova LifeStyle has the highest 3-year sales growth rate while the VALUE sortshows that the stock’s Quarterly Price-to-Book (P/B) is below the Market-Cap weighted average for the industry although its P/E is only slightly below. Companies with fast growing top lines are often interesting once margins begin to expand. Nova LifeStyle merits monitoring, especially for when the purchasing agreement with IKEA is finalized.

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