Business Context and Reporting Period
La-Z-Boy Incorporated manufactures, imports, distributes and retails upholstered and casegoods furniture through its Wholesale, Retail and Corporate & Other activities, including Joybird. This unaudited Form 10-Q covers the third quarter and first nine months of fiscal 2021, ended January 23, 2021, compared with the periods ended January 25, 2020.
The Company operated 158 company-owned La-Z-Boy Furniture Galleries stores, five major U.S. manufacturing locations, seven regional distribution centers and three facilities in Mexico. Fiscal 2021 segment results were revised to combine the former Upholstery and Casegoods segments into the Wholesale segment.
Key Financial Metrics
| Metric | Q3 FY2021 | Q3 FY2020 | 9M FY2021 | 9M FY2020 |
|---|---|---|---|---|
| Sales | $470.2 million | $475.9 million | $1,214.8 million | $1,336.7 million |
| Gross profit | $201.3 million | $199.6 million | $518.2 million | $549.7 million |
| Gross margin | 42.8% | 42.0% | 42.7% | 41.1% |
| Operating income | $34.4 million | $52.3 million | $86.7 million | $105.3 million |
| Operating margin | 7.3% | 11.0% | 7.1% | 7.9% |
| Net income attributable to La-Z-Boy | $29.2 million | $34.5 million | $69.0 million | $75.2 million |
| Diluted EPS | $0.62 | $0.74 | $1.49 | $1.60 |
| Cash flow from operations | Not separately provided | Not separately provided | $249.8 million | $119.8 million |
Q3 net margin was approximately 6.2%, compared with approximately 7.3% in the prior-year quarter. The effective tax rate was 27.7% for Q3 and 26.4% for the first nine months, compared with 26.0% and 25.3%, respectively, in the prior-year periods.
- At January 23, 2021, cash, cash equivalents and restricted cash totaled $393.0 million, compared with $263.5 million at April 25, 2020. Investments totaled $53.1 million.
- Revolving-credit borrowings were zero after repayment of the $75.0 million borrowed in fiscal 2020. Excess availability was $56.7 million under the $150.0 million commitment.
- Current assets were $888.2 million and current liabilities were $550.8 million. Current liabilities included $162.6 million of customer deposits and $93.9 million of deferred revenue.
- Total lease liabilities were $355.8 million. The filing reports no outstanding revolving debt, but lease liabilities remain material.
- Nine-month investing cash use was $35.7 million, including $26.7 million of capital expenditures and $7.8 million for acquisitions. Financing cash use was $87.8 million, primarily debt repayment, dividends and payments to joint-venture minority partners.
Material Changes Versus the Prior Comparable Period
- Q3 sales declined 1.2% and nine-month sales declined 9.1%, primarily because COVID-19-related production, delivery and overseas-shipment constraints limited the Company’s ability to fulfill strong demand.
- Q3 operating income declined 34.2%; nine-month operating income declined 17.7%. Operating margin decreased 370 basis points in Q3 and 80 basis points for the nine-month period.
- Gross margin improved 80 basis points in Q3 and 160 basis points for the nine-month period, aided by favorable mix, stronger Joybird margins and lower comparative supply-chain initiative costs. These benefits were partly offset by manufacturing-capacity expansion costs, COVID-19 effects and higher raw-material costs.
- SG&A increased as a percentage of sales, including a $10.0 million Q3 and $12.5 million nine-month charge for the increase in the fair value of the Joybird contingent consideration liability. The prior-year periods benefited from a $9.7 million gain on the sale of the Redlands facility.
- Wholesale sales decreased 3.9% in Q3 and 11.4% for nine months; Wholesale operating margin fell to 10.2% and 10.4%, respectively.
- Retail sales decreased 0.9% in Q3 and 8.6% for nine months. Delivered same-store sales declined 6.3% in Q3 and 11.7% for nine months, while written same-store sales increased 9.1% and 18.2%, respectively.
- Corporate & Other sales increased 31.3% in Q3 and 19.3% for nine months, primarily due to Joybird. Joybird sales increased 30.3% in Q3 to $28.6 million and 47% in written orders for the quarter.
- Operating cash flow increased $130.1 million year over year, largely because of higher customer deposits and other liabilities associated with increased written sales.
Guidance, Outlook, Risks and Unusual Items
- Management expects fiscal 2021 capital expenditures of approximately $35 million to $40 million for manufacturing and distribution upgrades, new Mexico capacity, technology and retail-store improvements.
- Management stated that liquidity is adequate for short- and long-term requirements, growth plans, operations and capital expenditures. It also expects to remain opportunistic with share repurchases.
- The Company incurred $3.9 million of business-realignment expenses during the first nine months, primarily severance and impairment related to the Newton, Mississippi facility. Demand subsequently exceeded production capacity, leading to additional Mexico capacity, weekend shifts, partial Newton reactivation and a leased Mexico upholstery plant.
- The Company recognized $5.2 million of non-operating income in Q3 from employee-retention payroll tax credits under the CARES Act.
- The Joybird contingent consideration liability increased by $12.5 million during the nine months, including a $10.0 million Q3 charge, based on improved projected revenue and earnings. The liability was $12.5 million at January 23, 2021.
- COVID-19 remains the principal uncertainty, affecting consumer demand, government restrictions, labor availability, production capacity, shipping, supply-chain costs and delivery timing. Management stated that future actions depend on virus mitigation, government directives, economic conditions and supply-chain recovery.
- The Company reinstated its regular quarterly dividend at $0.14 per share in Q3 and declared a $0.15 per share dividend on February 16, 2021. Share repurchases resumed in December 2020; 22,050 shares were purchased under the authorization during Q3 for approximately $0.9 million, with 4.5 million shares remaining available.
- The filing reports no material changes to previously disclosed risk factors, market risks, contractual obligations or critical accounting policies.
Investor Verification Items
- Verify whether strong written-order growth converts into delivered sales as manufacturing capacity and supply-chain constraints ease.
- Assess the sustainability of improved gross margins, particularly Joybird pricing, mix and manufacturing-cost trends.
- Monitor the $12.5 million Joybird contingent consideration liability and potential future earnout payments.
- Reconcile operating cash flow with customer deposits and deferred revenue, which may create working-capital timing effects.
- Confirm the availability and covenant status of the revolving credit facility, including the $56.7 million reported excess availability.
- Evaluate COVID-19 exposure, raw-material inflation, overseas shipping delays, labor constraints and the costs of added production capacity.
- Review the declared February 2021 dividend and the Company’s planned capital expenditures and share-repurchase activity against future cash generation.