La-Z-Boy Incorporated: Fiscal 2022 Third-Quarter Form 10-Q
Business context and reporting period
Unaudited results cover the quarter and nine months ended January 22, 2022, compared with January 23, 2021. La-Z-Boy manufactures, distributes and retails upholstered and casegoods furniture through its Wholesale, Retail and Corporate & Other operations. The company operated 163 company-owned La-Z-Boy Furniture Galleries stores and maintained broader independent retail and online distribution channels.
Key financial metrics
| Metric | Q3 FY2022 | Q3 FY2021 | 9M FY2022 | 9M FY2021 |
|---|---|---|---|---|
| Sales | $571.6 million | $470.2 million | $1.672 billion | $1.215 billion |
| Gross profit | $219.4 million | $201.3 million | $644.7 million | $518.2 million |
| Gross margin | 38.4% | 42.8% | 38.6% | 42.7% |
| Operating income | $39.5 million | $34.4 million | $128.0 million | $86.7 million |
| Operating margin | 6.9% | 7.3% | 7.7% | 7.1% |
| Net income attributable to La-Z-Boy | $28.5 million | $29.2 million | $92.5 million | $69.0 million |
| Diluted EPS | $0.65 | $0.62 | $2.07 | $1.49 |
Q3 sales increased 21.6% and nine-month sales increased 37.7%. Q3 operating income rose 14.7%, while nine-month operating income rose 47.6%. The Q3 gross-margin decline was driven by higher raw-material, freight and tariff costs, production inefficiencies, labor constraints and component shortages. Pricing and surcharge actions partially offset these pressures.
Segment performance was mixed. Q3 Wholesale sales increased 20.7% to $423.3 million, but operating income decreased 22.5% to $27.6 million, reducing margin to 6.5% from 10.2%. Retail sales increased 18.7% to $197.1 million and operating income increased 63.9% to $24.1 million, with margin expanding to 12.2% from 8.9%. Corporate & Other sales increased 48.3% to $50.0 million, while its operating loss improved to $12.3 million from $16.0 million, partly because the prior-year period included a $10.0 million Joybird contingent-consideration charge.
Cash flow, balance sheet, debt and liquidity
- Nine-month operating cash flow was $45.2 million, down from $249.8 million, primarily because of higher inventory and the prior-year benefit from increased customer deposits.
- Investing cash outflow was $77.0 million, including $58.6 million of capital expenditures and $24.8 million for acquisitions.
- Financing cash outflow was $122.3 million, including $75.6 million of share repurchases, $23.0 million of acquisition-related holdback payments and $20.6 million of dividends.
- Cash, cash equivalents and restricted cash were $240.0 million at January 22, 2022, compared with $394.7 million at April 24, 2021. Investments to enhance cash returns were $29.8 million.
- The company had no borrowings under its new five-year, $200.0 million unsecured revolving credit facility, which matures October 15, 2026 and allows up to an additional $100.0 million of commitments or term loans at lenders’ discretion. The company was in compliance with its financial covenants.
- Inventory increased to $315.6 million from $226.1 million at fiscal year-end, reflecting efforts to secure materials and support higher demand and manufacturing capacity.
- Total lease liabilities were $411.7 million, including current and long-term obligations. Total assets were $1.930 billion and total equity was $784.5 million.
Material changes, outlook and unusual items
- Demand remained strong, but orders continued to exceed production capacity and backlog remained elevated. The company expanded capacity through additional manufacturing shifts, Mexico facilities, plant upgrades and a new Torreon, Mexico facility that began operations at the end of Q3.
- COVID-19-related supply-chain disruption, factory shutdowns in Vietnam, raw-material and freight inflation, labor shortages and component availability constrained production and margins. Management stated that the duration and effects of these conditions remain uncertain.
- Fiscal 2022 capital expenditures are expected to be $80 million to $85 million; spending will continue into Q4.
- The company acquired Furnico Furniture Ltd. in the U.K. for approximately $11.8 million, four Alabama and Chattanooga-area stores for $8.3 million, and three Long Island stores for $4.5 million. These acquisitions were not individually material to the consolidated financial statements.
- Q3 other expense was $1.5 million, compared with $6.5 million of other income in the prior-year quarter. Fiscal 2021 benefited from approximately $5.2 million of CARES Act payroll tax credits and investment gains; fiscal 2022 primarily reflected investment losses.
- The company repurchased 2.1 million shares for $75.6 million during the first nine months and had 7.9 million shares remaining under its authorization at January 22, 2022. Management expected to continue repurchases based on anticipated fiscal 2022 operating cash flow.
- Management stated that cash on hand and available credit capacity should provide adequate liquidity for operations over the next 12 months. No formal revenue or earnings guidance was provided in the filing.
Important facts for investors to verify
- Whether pricing and surcharge actions can fully offset continuing material, freight, tariff, labor and manufacturing costs.
- The duration and operational effects of COVID-19, supply-chain disruptions, Vietnam factory shutdowns and elevated backlog.
- Whether inventory growth converts into revenue and cash without increased obsolescence, cancellations or working-capital pressure.
- Progress and returns from the Furnico and company-owned retail acquisitions, as well as the new Mexico capacity investments.
- The sustainability of share repurchases and dividends given the substantial decline in operating cash flow and increased capital spending.
- The terms and covenant requirements of the new revolving credit facility and the company’s future borrowing needs.
- Potential variability in Joybird profitability, marketing investment, contingent consideration and the remaining $4.6 million fair value of the Joybird contingent-consideration liability.